Form 10-K
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
February 1, 2009
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period
from to
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Commission file number
001-33608
lululemon athletica
inc.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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20-3842867
(I.R.S. Employer
Identification Number)
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2285 Clark Drive
Vancouver, British Columbia
(Address of principal executive offices)
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V5N 3G9
(Zip Code)
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Registrants telephone number, including area code:
(604) 732-6124
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, par value $0.01 per share
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Nasdaq Global Select Market
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Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 of Section 15(d) of the
Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting
company o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
rule 12b-2
of the Act).
Yes o No þ
The aggregate market value of the voting stock held by
non-affiliates of the registrant on August 3, 2008 was
approximately $806,836,834. Such aggregate market value was
computed by reference to the closing price of the common stock
as reported on the Nasdaq Global Select Market on August 3,
2008. For purposes of determining this amount only, the
registrant has defined affiliates as including the executive
officers and directors of the registrant on August 3, 2008.
Common
Stock:
At March 24, 2009 there were 50,654,349 shares of the
registrants common stock, par value $0.01 per share,
outstanding.
Exchangeable
and Special Voting Shares:
At March 24, 2009, there were outstanding 19,506,289
exchangeable shares of Lulu Canadian Holding, Inc., a
wholly-owned subsidiary of the registrant. Exchangeable shares
are exchangeable for an equal number of shares of the
registrants common stock.
In addition, at March 24, 2009, the registrant had
outstanding 19,506,289 shares of special voting stock,
through which the holders of exchangeable shares of Lulu
Canadian Holding, Inc. may exercise their voting rights with
respect to the registrant. The special voting stock and the
registrants common stock generally vote together as a
single class on all matters on which the common stock is
entitled to vote.
DOCUMENTS INCORPORATED BY REFERENCE
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DOCUMENT
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FORM 10-K REFERENCE
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Portions of Proxy Statement for the
2009 Annual Meeting of Stockholders
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Part III
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PART I
Overview
lululemon is a designer and retailer of technical athletic
apparel operating primarily in North America. Our yoga-inspired
apparel is marketed under the lululemon athletica brand name. We
believe consumers associate our brand with innovative, technical
apparel products. Our products are designed to offer
performance, fit and comfort while incorporating both function
and style. Our heritage of combining performance and style
distinctly positions us to address the needs of female athletes
as well as a growing core of consumers who desire everyday
casual wear that is consistent with their active lifestyles. We
also continue to broaden our product range to increasingly
appeal to male athletes. We offer a comprehensive line of
apparel and accessories including fitness pants, shorts, tops
and jackets designed for athletic pursuits such as yoga, dance,
running and general fitness. As of February 1, 2009, our
branded apparel was principally sold through our 113 stores that
are primarily located in Canada and the United States. We
believe our vertical retail strategy allows us to interact more
directly with, and gain insights from, our customers while
providing us with greater control of our brand.
We have developed a distinctive community-based strategy that we
believe enhances our brand and reinforces our customer loyalty.
The key elements of our strategy are to:
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design and develop innovative athletic apparel that combines
performance with style and incorporates real-time customer
feedback;
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locate our stores in street locations, lifestyle centers and
malls that position each lululemon athletica store as an
integral part of its community;
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create an inviting and educational store environment that
encourages product trial and repeat visits; and
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market on a grassroots level in each community, including
through influential fitness practitioners who embrace and create
excitement around our brand.
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We were founded in 1998 by Dennis Chip Wilson in
Vancouver, British Columbia. Noting the increasing number of
women participating in sports, and specifically yoga,
Mr. Wilson developed lululemon athletica to address a void
in the womens athletic apparel market. The founding
principles established by Mr. Wilson drive our distinctive
corporate culture with a mission of providing people with the
components to live a longer, healthier and more fun life.
Consistent with this mission, we promote a set of core values in
our business, which include developing the highest quality
products, operating with integrity, leading a healthy balanced
life, and training our employees in self responsibility and goal
setting. These core values attract passionate and motivated
employees who are driven to succeed and share our vision of
elevating the world from mediocrity to greatness. We
believe the energy and passion of our employees allow us to
successfully execute on our business strategy, enhance brand
loyalty and create a distinctive connection with our customers.
We believe our culture and community-based business approach
provide us with competitive advantages that are responsible for
our strong financial performance. Our net revenue has increased
from $40.7 million in fiscal 2004 to $353.5 million in
fiscal 2008, representing a 71.6% compound annual growth rate.
Our net revenue increased from $269.9 million in fiscal
2007 to $353.5 million in fiscal 2008, representing a 30.9%
increase. During fiscal 2008, our comparable store sales growth
was 0% and we reported income from operations of
$56.6 million. During fiscal 2007, our comparable store
sales growth was 34% and we reported income from operations of
$51.6 million. In the fiscal year ended February 1,
2009, our corporate-owned stores opened for at least one year
averaged sales of approximately $1,450 per square foot, compared
to sales per square foot of approximately $1,700 for the fiscal
year ended February 3, 2008, which we believe is among the
best in the apparel retail sector.
1
Our
Market
Our primary target customer is a sophisticated and educated
woman who understands the importance of an active, healthy
lifestyle. She is increasingly tasked with the dual
responsibilities of career and family and is constantly
challenged to balance her work, life and health. We believe she
pursues exercise to achieve physical fitness and inner peace.
As women have continued to embrace a variety of fitness and
athletic activities, including yoga, we believe other athletic
apparel companies are not effectively addressing their unique
style, fit and performance needs. We believe we have been able
to help address this void in the marketplace by incorporating
style along with comfort and functionality into our products.
Although we were founded to address the unique needs of women,
we are also successfully designing products for men who also
appreciate the technical rigor and premium quality of our
products. We also believe longer-term growth in athletic
participation will be reinforced as the aging Baby Boomer
generation focuses more on longevity. In addition, we believe
consumer purchase decisions are driven by both an actual need
for functional products and a desire to create a particular
lifestyle perception. As such, we believe the credibility and
authenticity of our brand expands our potential market beyond
just athletes to those who desire to lead an active, healthy,
and balanced life.
Our
Competitive Strengths
We believe that the following strengths differentiate us from
our competitors and are important to our success:
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Premium Active Brand. lululemon athletica
stands for leading a healthy, balanced and fun life. We believe
customers associate the lululemon athletica brand with high
quality premium athletic apparel that incorporates technically
advanced materials, innovative functional features and style. We
believe our focus on women differentiates us and positions
lululemon athletica to address a void in the growing market for
womens athletic apparel. The premium nature of our brand
is reinforced by our vertical retail strategy and our selective
distribution through yoga studios and fitness clubs that we
believe are the most influential within the fitness communities
of their respective markets. While our brand has its roots in
yoga, our products are increasingly being designed and used for
other athletic and casual lifestyle pursuits. We work with local
athletes and fitness practitioners to enhance our brand
awareness and broaden our product appeal.
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Distinctive Retail Experience. We locate our
stores in street locations, lifestyle centers and malls that
position lululemon athletica stores to be an integral part of
their communities. Our retail concept is based on a
community-centric philosophy designed to offer customers an
inviting and educational experience. We believe that this
environment encourages product trial, purchases and repeat
visits. We coach our store sales associates, who we refer to as
educators, to develop a personal connection with
each guest. They receive approximately 30 hours of in-house
training within the first three months of the start of their
employment and are well prepared to explain the technical and
innovative design aspects of each product.
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Innovative Design Process. We offer
high-quality premium apparel that is designed for performance,
comfort, functionality and style. We attribute our ability to
develop superior products to a number of factors, including:
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our feedback-based design process through which our design and
product development team proactively and frequently seeks input
from our customers and local fitness practitioners;
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close collaboration with our third-party suppliers to formulate
innovative and technically-advanced fabrics and features for our
products; and
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although we typically bring products from design to market in
eight to 10 months, our vertical retail strategy enables us
to bring select products to market in as little as one month,
thereby allowing us to respond quickly to customer feedback,
changing market conditions and apparel trends.
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Community-Based Marketing Approach. We
differentiate lululemon athletica through an innovative,
community-based approach to building brand awareness and
customer loyalty. We use a multi-faceted grassroots marketing
strategy that includes partnering with local fitness
practitioners and retail educators and creating in-store
community boards. Each of our stores has a dedicated community
coordinator who
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organizes fitness or philanthropic events that heighten the
image of our brand in the community. We believe this grassroots
approach allows us to successfully increase brand awareness and
broaden our appeal while reinforcing our premium brand image.
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Deep Rooted Culture Centered on Training and Personal
Growth. We believe our core values and
distinctive corporate culture allow us to attract passionate and
motivated employees who are driven to succeed and share our
vision. We provide our employees with a supportive,
goal-oriented environment and encourage them to reach their full
professional, health and personal potential. We offer programs
such as personal development workshops and goal coaching to
assist our employees in realizing their long-term objectives. We
believe our relationship with our employees is exceptional and a
key contributor to our success.
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Experienced Management Team with Proven Ability to
Execute. Our founder, Mr. Wilson, leads our
design team and plays a central role in corporate strategy and
in promoting our distinctive corporate culture. Our Chief
Executive Officer, Ms. Day, whose experience includes
20 years at Starbucks Corporation, most recently serving as
President of Asia Pacific Group of Starbucks International from
2004 to 2007, joined us in January 2008. Mr. Wilson and
Ms. Day have assembled a management team with a
complementary mix of retail, design, operations, product
sourcing and marketing experience from leading apparel and
retail companies such as Abercrombie & Fitch Co.,
Nike, Inc., New York & Company, Inc. and Speedo
International Limited. We believe our management team is well
positioned to execute the long-term growth strategy for our
business.
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Growth
Strategy
Key elements of our growth strategy are to:
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Grow our Store Base in North America. As of
February 1, 2009, our products were sold through 108 stores
in North America, including 43 in Canada and 65 in the United
States. We expect that most of our near-term store growth will
occur in the United States. We plan to add new stores to
strengthen existing markets and selectively enter new markets in
the United States and Canada. We opened 35 stores in the United
States and Canada in fiscal 2008, and we plan to open
approximately six additional stores in fiscal 2009 in the
United States and Canada.
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Develop a Retail Website. We expect to launch
a retail website in the first quarter of fiscal 2009. The
addition of an ecommerce sales channel will expand our customer
base and supplement our growing store base. This site will be
designed to reflect the distinctive retail experience that our
customers enjoy in our stores while providing greater shopping
flexibility.
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Increase our Brand Awareness. We will continue
to increase brand awareness and customer loyalty through our
grassroots marketing efforts and planned store expansion. We
believe that increased brand awareness will result in increased
comparable store sales and sales productivity over time.
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Introduce New Product Technologies. We remain
focused on developing and offering products that incorporate
technology-enhanced fabrics and performance features that
differentiate us in the market. Collaborating with leading
fabric manufacturers, we have jointly developed and trademarked
names for innovative fabrics such as Luon and Silverescent, and
natural stretch fabrics using organic elements such as bamboo,
soy, and seaweed. Among our ongoing efforts, we are jointly
developing encapsulation-enhanced fabrics to provide advanced
features such as UV protection and temperature control. In
addition, we will continue to develop differentiated
manufacturing techniques that provide greater support,
protection, and comfort.
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Broaden the Appeal of our Products. We will
selectively seek opportunities to expand the appeal of our brand
to improve store productivity and increase our overall
addressable market. To enhance our product appeal, we intend to:
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Expand our Product Categories. We plan to
expand our product offerings in complementary existing and new
categories such as bags, undergarments and outerwear;
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Grow our Mens Business. We believe the
premium quality and technical rigor of our products will
continue to appeal to men and that there is an opportunity to
expand our mens business as a proportion of our total
sales;
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Increase the Range of Athletic Activities our Products
Target. We expect customers to increasingly
purchase our products for activities such as yoga, running,
dance and general fitness as we educate them on the versatility
of our products and expand our product categories; and
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Expand Beyond North America. As of
February 1, 2009, we operated five franchise stores in
Australia and one showroom in Hong Kong which is
corporate-owned.
Over time, we intend to expand on our own or pursue additional
joint venture opportunities in other Asian and European markets.
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Our
Stores
As of February 1, 2009, our retail footprint included 43
stores in Canada, 65 stores in the United States and five
franchise stores in Australia. We discontinued our operations in
Japan in fiscal 2008. The 108 stores in Canada and the United
States include one franchise store in Canada and four in the
United States. While most of our stores are branded lululemon
athletica, two of our corporate-owned stores are branded
oqoqo and specialize in apparel made with sustainable
organic or recycled fabrics. Our retail stores are located
primarily on street locations, in lifestyle centers and in malls.
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The following store list shows the number of branded stores
(including corporate-owned stores and franchise stores) operated
in each Canadian province, U.S. state, and internationally
as of February 1, 2009:
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Corporate-Owned
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Franchise
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Total
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Stores
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Stores
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Stores
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Canada
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Alberta
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8
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8
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British Columbia
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11
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11
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Manitoba
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1
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1
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Nova Scotia
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1
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1
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Ontario
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17
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17
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Québec
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4
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4
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Saskatchewan
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1
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1
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Total Canada
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42
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1
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43
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United States
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California
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19
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1
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20
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Colorado
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3
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3
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Connecticut
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2
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2
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District of Columbia
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2
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2
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Florida
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2
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2
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Hawaii
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1
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1
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Illinois
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6
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6
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Maryland
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2
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2
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Massachusetts
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4
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4
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Michigan
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1
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1
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Nevada
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1
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1
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New Jersey
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2
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2
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New York
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7
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7
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Oregon
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1
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1
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Pennsylvania
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1
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1
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Texas
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5
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5
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Virginia
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2
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2
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Washington
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3
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3
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Total United States
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61
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4
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65
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International
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Australia
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5
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5
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Total International
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5
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5
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Overall total, as of February 1, 2009
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103
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10
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113
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Overall total, as of February 3, 2008
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71
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10
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81
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Store
Economics
We believe that our innovative retail concept and customer
experience contribute to the success of our stores. During
fiscal 2008 our corporate-owned stores open at least one year,
which average approximately 2,800 square feet, averaged
sales of approximately $1,450 per square foot.
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Management performs an ongoing evaluation of its portfolio of
corporate-owned store locations. In response to the current
challenging operating environment, our management team has taken
a series of actions designed to reduce ongoing operating costs
and improve operating efficiencies through reductions in
employee headcount, the disposal of property and equipment, and
possible store closures. In the fourth quarter of fiscal 2008 we
closed one corporate-owned store in Texas. As we continue our
evaluation we may in future periods close additional
corporate-owned store locations.
Store
Expansion
From February 1, 2002 (when we had one store, in Vancouver)
to February 1, 2009, we opened 103 corporate-owned stores
in North America. We opened our first corporate-owned store in
the United States in 2003. Over the next few years, our new
store growth will be primarily focused on corporate-owned stores
in the United States, an attractive market with a population of
over nine times that of Canada. We opened 35 stores in the
United States and Canada in fiscal 2008.
Franchise
Stores in North America
As of February 1, 2009 we had one franchise store in Canada
and four franchise stores in the United States. We reacquired
the franchise rights of two Victoria, British Columbia and one
Bellevue, Washington locations thereby decreasing the net
revenue earned through our franchise channel. This channel
represented 4.6% of our net revenue in fiscal 2008 and 6.7% of
our net revenue in fiscal 2007. We began opening franchise
stores in select markets in 2002 to expand our store network
while limiting required capital expenditures. Opening new
franchise stores is not a significant part of our near-term
store growth strategy. We continue to evaluate the ability to
repurchase attractive franchises, which, in some cases, we can
contractually acquire at a specified percentage of trailing
12-month
sales. Unless otherwise approved by us, our franchisees are
required to sell only our branded products, which are purchased
from us at a discount to the suggested retail price.
International
Stores
Beyond North America, we intend, as part of our long-term
business strategy, to expand our global presence. We believe
that partnering with companies and individuals with significant
experience and proven success in the target country is to our
advantage. As of February 1, 2009, we had two franchise
stores in Melbourne, Australia and three franchise stores in
Sydney, Australia, and one corporate-owned showroom in Hong
Kong. In fiscal 2008, we reevaluated our operating performance
in Japan and our strategic priorities and discontinued our
operations in Japan in the third quarter of fiscal 2008.
Wholesale
Channel
We also sell lululemon athletica products through premium yoga
studios, health clubs and fitness centers. This channel
represented only 1.7% of our net revenue in fiscal 2008 and 1.8%
of our net revenue in fiscal 2007. We believe that these premium
wholesale locations offer an alternative distribution channel
that is convenient for our core consumer and enhances the image
of our brand. We do not intend wholesale to be a meaningful
contributor to overall sales. Instead we use the channel to
build brand awareness, especially in new markets.
Our
Products
We offer a comprehensive line of performance apparel and
accessories for both women and men. Our apparel assortment,
including items such as fitness pants, shorts, tops and jackets,
is designed for healthy lifestyle activities such as yoga,
dance, running and general fitness. Although we benefit from the
growing number of people that participate in yoga, we believe
the percentage of our products sold for other activities will
continue to increase as we broaden our product range to address
other activities. Our fitness-related accessories include an
array of items such as bags, socks, underwear, yoga mats,
instructional yoga DVDs, water bottles and headbands.
We believe the authenticity of our products is driven by a
number of factors. These factors include our athlete-inspired
design process, our use of technical materials, our
sophisticated manufacturing methods and our innovative product
features. Our athletic apparel is designed and manufactured
using cutting-edge fabrics that deliver
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maximum function and athletic fit. We collaborate with leading
fabric suppliers to develop advanced fabrics that we sell under
our trademarks. Our in-house design team works closely with our
suppliers to formulate fabrics that meet our performance and
functional specifications such as stretch ability, capability to
wick moisture and durability. We currently incorporate the
following advanced fabrics in our products:
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Luon, included in more than half of our products, wicks
away moisture, moves with the body and is designed to eliminate
irritation;
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Silverescent incorporates silver directly into the fabric
to reduce odors as a result of the antibacterial properties of
the silver in the fabric; and
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VitaSea, derived from a seaweed compound.
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Our design team continues to develop fabrics that we believe
will help advance our product line and differentiate us from the
competition.
Our products are constructed with advanced sewing techniques
such as flat seaming, and care and content labels which increase
comfort and functionality by reducing skin irritation and
strengthening important seams. Our apparel products include
innovative features to promote convenience, such as pockets
designed to hold credit cards, keys, digital audio players and
clips for heart rate monitors.
Our
Culture and Values
Since our inception, Mr. Wilson has developed a distinctive
corporate culture with a mission to provide people with
components to live a longer, healthier and more fun life. We
promote a set of core values in our business, which include
developing the highest quality products, operating with
integrity, leading a healthy balanced life and instilling in our
employees a sense of self responsibility and personal
achievement. These core values allow us to attract passionate
and motivated employees who are driven to succeed and share our
vision of elevating the world from mediocrity to
greatness.
Community-Based
Marketing
We differentiate our business through an innovative,
community-based approach to building brand awareness and
customer loyalty. We pursue a multi-faceted strategy which
leverages our local ambassadors, in-store community boards,
retail educators and a variety of grassroots initiatives. Our
ambassadors, who are local fitness practitioners, share our core
values and introduce our brand to their fitness classes and
communities leading to interest in the brand, store visits and
word-of-mouth marketing. Our in-store community boards, coupled
with our educators knowledge, further position our stores
as community destinations designed to educate and enrich our
customers. Each of our stores has a dedicated community
coordinator who selectively organizes events that heighten the
image of our brand in the community. Each of our community
coordinators customizes a local marketing plan to focus on the
important athletic and philanthropic activities within each
community.
Product
Design and Development
Our product design efforts are led by Mr. Wilson and a team
of 13 designers based in Vancouver, British Columbia. Our team
is comprised of dedicated athletes and users of our products who
embody our design philosophy and dedication to premium quality.
While our design team identifies trends based on market
research, we primarily use an innovative feedback-based design
process through which we proactively seek the input of customers
and our ambassadors. Our ambassadors have become an integral
part of our product design process as they test and evaluate our
products, providing real-time feedback on performance and
functionality. Our design team also hosts meetings each year in
many of our markets. In these meetings, local athletes,
trainers, yogis and members of the fitness industry discuss our
products and provide us with additional feedback and ideas.
Members of our design team also regularly work at our stores,
which gives them the opportunity to interact with and receive
direct feedback from customers. Our design team incorporates all
of this input to adjust fit and style, to detect new athletic
trends and to identify desirable fabrics.
7
To ensure that we continue to provide our customers with
advanced fabrics, our design team works closely with our
suppliers to incorporate innovative fabrics that meet particular
specifications into our products. These specifications include
characteristics such as stretch ability, capability to wick
moisture and durability. In addition, to ensure the product
quality of our fabric and its authenticity, we test our products
using a leading testing facility. We also partner with a leading
independent inspection, verification, testing and certification
company, which conducts a battery of tests before each season on
all of our fabrics across all product lines, testing for a
variety of attributes including content, pilling, shrinkage, and
colorfastness. We collaborate with leading fabric suppliers to
develop fabrics that we ultimately trademark for brand
recognition whenever possible.
We typically bring new products from design to market in
approximately eight to 10 months; however, our vertical
retail structure enables us to bring select new products to
market in as little as one month. We believe our lead times are
shorter than a typical apparel wholesaler due to our streamlined
design and development process as well as the real-time input we
receive from our consumers and ambassadors through our
corporate-owned store locations. Our process does not involve
edits by intermediaries, such as retail buyers or a sales force,
and we believe it incorporates a shorter sample process than
typical apparel wholesalers. This rapid turnaround time allows
us to respond relatively quickly to trends or changing market
conditions.
Sourcing
and Manufacturing
We do not own or operate any manufacturing facilities, nor do we
contract directly with third-party vendors for fabrics and
finished goods. The fabric used in our products is sourced by
our manufacturers from a limited number of pre-approved
suppliers. We work with a group of approximately 30
manufacturers, 10 of which produced approximately 85% of our
products in fiscal 2008. During fiscal 2008, no single
manufacturer produced more than 22% of our product offering.
During fiscal 2008, approximately 65% of our products were
produced in China, approximately 15% in Canada, approximately 7%
in South East Asia and the remainder in the United States,
Israel, Peru, Korea, and Taiwan. Our North American
manufacturers typically produce more core products and provide
us with the speed to market necessary to respond quickly to
changing trends and increased demand. While we plan to support
future growth through manufacturers outside of North America,
our intent is also to maintain production in Canada and the
United States. We have developed long-standing relationships
with a number of our vendors and take great care to ensure that
they share our commitment to quality and ethics. We do not,
however, have any long term agreements requiring us to use any
manufacturer, and no manufacturer is required to produce our
products in the long-term. We require that all of our
manufacturers adhere to a code of conduct regarding quality of
manufacturing, working conditions and other social concerns. We
currently also work with a leading inspection and verification
firm to closely monitor each suppliers compliance with
applicable law and our workplace code of conduct.
Distribution
Facilities
We centrally distribute finished products in North America from
distribution facilities in Vancouver, British Columbia and
Renton, Washington. The facility in Washington is operated by a
third party. Our contract for the Renton, Washington
distribution facility expires in April 2010. We operate the
distribution facility in Vancouver, which is leased and is
approximately 74,000 square feet. We believe that this
modern facility enhances the efficiency of our operations. We
believe our distribution infrastructure will be sufficient to
accommodate our expected store growth and expanded product
offerings over the next several years. Merchandise is typically
shipped to our stores through third party delivery services
multiple times per week, providing them with a steady flow of
new inventory.
Competition
Competition in the athletic apparel industry is principally on
the basis of brand image and recognition as well as product
quality, innovation, style, distribution and price. We believe
that we successfully compete on the basis of our premium brand
image, our focus on women and our technical product innovation.
In addition, we believe our vertical retail distribution
strategy differentiates us from our competitors and allows us to
more effectively control our brand image.
8
The market for athletic apparel is highly competitive. It
includes increasing competition from established companies who
are expanding their production and marketing of performance
products, as well as from frequent new entrants to the market.
We are in direct competition with wholesalers and direct sellers
of athletic apparel, such as Nike, Inc., adidas AG, which
includes the adidas and Reebok brands, and Under Armour, Inc. We
also compete with retailers specifically focused on womens
athletic apparel including Lucy Activewear Inc., The Finish Line
Inc. (including Finish Line and Paiva collection), and bebe
stores, inc. (BEBE SPORT collection).
Our
Employees
As of February 1, 2009, we had 2,861 employees, of
which 1,832 were employed in Canada and 1,029 were employed in
the United States. Of the 1,832 Canadian employees, 1,399 were
employed in our corporate-owned stores, 71 were employed in
distribution, 70 were employed in design, merchandise and
production, and the remaining 292 performed selling, general and
administrative and other functions. Of the 1,029 employees
in the United States, 1,013 were employed in our corporate-owned
stores and showrooms and 16 performed selling, general and
administration functions. None of our employees are currently
covered by a collective bargaining agreement. We have had no
labor-related work stoppages and we believe our relations with
our employees are excellent.
Intellectual
Property
We believe we own the material trademarks used in connection
with the marketing, distribution and sale of all of our
products, in Canada, the United States and in the other
countries in which our products are currently or intended to be
either sold or manufactured. Our major trademarks include
lululemon athletica & design, the logo design (WAVE
design) and lululemon as a word mark. In addition to the
registrations in Canada and the United States,
lululemons design and word mark are registered in over 66
other jurisdictions which cover over 114 countries. We own
trademark registrations or have made trademark applications for
names of several of our fabrics including Luon, Silverescent,
VitaSea, Soyla, Boolux and LULLURE.
Securities
and Exchange Commission Filings
Our website address is www.lululemon.com. We provide free access
to various reports that we file with, or furnish to, the United
States Securities and Exchange Commission, or SEC, through our
website, as soon as reasonably practicable after they have been
filed or furnished. These reports include, but are not limited
to, our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and any amendments to those reports. Our SEC reports can also be
accessed through the SECs website at www.sec.gov. Also
available on our website are printable versions of our Code of
Business Conduct and Ethics and charters of the Audit,
Compensation, and Nominating and Governance Committees of our
Board of Directors. Information on our website does not
constitute part of this annual report on
Form 10-K
or any other report we file or furnish with the SEC.
9
An investment in our common stock involves a high degree of
risk. You should carefully consider the risks described below
together with all of the other information included or
incorporated by reference in this
Form 10-K
before making an investment decision. If any of the following
risks actually occurs, our business, financial condition or
results of operations could materially suffer. In that case, the
trading price of our common stock could decline, and you may
lose all or part of your investment.
Risks
Related to Our Business
General
economic conditions and volatility in the worldwide economy has
adversely affected consumer spending, which is likely to
negatively affect our business.
Our operations and performance depend significantly on economic
conditions, particularly those in Canada and the United States,
and their impact on levels of consumer spending. Consumer
spending on non-essential items is affected by a number of
factors, including consumer confidence in the strength of
economies, fears of recession, the tightening of credit markets,
higher levels of unemployment, higher tax rates, the cost of
consumer credit and other factors. The current volatility in the
United States economy in particular has resulted in an overall
slowing in growth in the retail sector because of decreased
consumer spending, which may remain depressed for the
foreseeable future. These unfavorable economic conditions may
lead our customers to delay or reduce purchase of our products.
In addition, we expect to experience reduced traffic in our
stores and limitations on the prices we can charge for our
products, which may include price discounts, either of which
could reduce our sales and profit margins. Economic factors such
as those listed above and increased transportation costs,
inflation, higher costs of labor, insurance and healthcare, and
changes in other laws and regulations may increase our cost of
sales and our operating, selling, general and administrative
expenses. These and other economic factors could have a material
adverse affect on the demand for our products and on our
financial conditions, operating results and stock price.
We
have grown rapidly in recent years and we have limited operating
experience at our current scale of operations; if we are unable
to manage our operations at our current size or to manage any
future growth effectively, our brand image and financial
performance may suffer.
We have expanded our operations rapidly since our inception in
1998 and we have limited operating experience at our current
size. We opened our first store in Canada in 1999 and our first
store in the United States in 2003. Our net revenue
increased from $40.7 million in fiscal 2004 to
$353.5 million in fiscal 2008, representing a compound
annual increase of approximately 71.6%. We expect our net
revenue growth rate to slow as the number of new stores that we
open in the future declines relative to our larger store base.
Our substantial growth to date has placed a significant strain
on our management systems and resources. If our operations
continue to grow, of which there can be no assurance, we will be
required to continue to expand our sales and marketing, product
development and distribution functions, to upgrade our
management information systems and other processes, and to
obtain more space for our expanding administrative support and
other headquarters personnel. Our continued growth could
increase the strain on our resources, and we could experience
serious operating difficulties, including difficulties in
hiring, training and managing an increasing number of employees,
difficulties in obtaining sufficient raw materials and
manufacturing capacity to produce our products, and delays in
production and shipments. These difficulties would likely result
in the erosion of our brand image and lead to a decrease in net
revenue, income from operations and the price of our common
stock.
We may
not be able to successfully open new store locations in a timely
manner, if at all, which could harm our results of
operations.
Our growth will largely depend on our ability to successfully
open and operate new stores. Our ability to successfully open
and operate new stores depends on many factors, including, among
others, our ability to:
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identify suitable store locations, the availability of which is
outside of our control;
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negotiate acceptable lease terms, including desired tenant
improvement allowances;
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hire, train and retain store personnel and field management;
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assimilate new store personnel and field management into our
corporate culture;
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source sufficient inventory levels; and
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successfully integrate new stores into our existing operations
and information technology systems.
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Successful new store openings may also be affected by our
ability to initiate our grassroots marketing efforts in advance
of opening our first store in a new market. We typically rely on
our grassroots marketing efforts to build awareness of our brand
and demand for our products. Our grassroots marketing efforts
are often lengthy and must be tailored to each new market based
on our emerging understanding of the market. Accordingly, there
can be no assurance that we will be able to successfully
implement our grassroots marketing efforts in a particular
market in a timely manner, if at all. Additionally, we may be
unsuccessful in identifying new markets where our technical
athletic apparel and other products and brand image will be
accepted or the performance of our stores will be considered
successful. Further, we will encounter pre-operating costs and
we may encounter initial losses while new stores commence
operations.
We plan to open new stores in the near future to add to our
existing store base. Of the 113 stores in operation as of
February 1, 2009, we opened three new stores in Canada, 32
new stores in the United States and two new stores outside of
North America in fiscal 2008. In the third quarter of fiscal
2008 we agreed with our Japanese joint venture partner to end
all operations as a joint venture and as a result we closed four
corporate-owned stores in Japan. We expect to open a total of
six additional stores in fiscal 2009 in the United States and
Canada. We estimate that we will incur approximately
$3.2 million of capital expenditures in fiscal 2009 to open
these six additional stores. In addition, our new stores may not
be immediately profitable and we may incur losses until these
stores become profitable. There can be no assurance that we will
open the planned number of new stores in fiscal 2009. Any
failure to successfully open and operate new stores will harm
our results of operations.
Our
limited operating experience and limited brand recognition in
new markets may limit our expansion strategy and cause our
business and growth to suffer.
Our future growth depends, to a considerable extent, on our
expansion efforts outside of Canada, especially in the United
States. Our current operations are based largely in Canada and
the United States. As of February 1, 2009, we had 43 stores
in Canada, 65 stores in the United States and five franchise
stores in Australia. We have limited experience with regulatory
environments and market practices outside of Canada and the
United States, and cannot guarantee that we will be able to
penetrate or successfully operate in any market outside of North
America. As previously disclosed, we have discontinued our
operations in Japan. In connection with our initial expansion
efforts outside of North America, we have encountered many
obstacles we do not face in Canada or the United States,
including cultural and linguistic differences, differences in
regulatory environments and market practices, difficulties in
keeping abreast of market, business and technical developments
and foreign customers tastes and preferences.
We may also encounter difficulty expanding into new markets
because of limited brand recognition leading to delayed
acceptance of our technical athletic apparel by customers in
these new markets. In particular, we have no assurance that our
grassroots marketing efforts will prove successful outside of
the narrow geographic regions in which they have been used in
the United States and Canada. We anticipate that as our business
expands into new markets and as the market becomes increasingly
competitive, maintaining and enhancing our brand may become
increasingly difficult and expensive. Conversely, as we
penetrate these markets and our brand becomes more widely
available, it could potentially detract from the appeal stemming
from the scarcity of our brand. Our brand may also be adversely
affected if our public image or reputation is tarnished by
negative publicity. Maintaining and enhancing our brand will
depend largely on our ability to be a leader in the athletic
apparel industry, to offer a unique store experience to our
customers and to continue to provide high quality products and
services, which we may not do successfully. Failure to develop
new markets outside of Canada or disappointing growth outside of
Canada will harm our business and results of operations. In
addition, if we are unable to maintain or enhance our brand
image our results of operations may suffer and our business may
be harmed.
11
We
plan to primarily use cash from operations to finance our growth
strategy, and if we are unable to maintain sufficient levels of
cash flow we may not meet our growth expectations.
We intend to finance our growth through the cash flows generated
by our existing stores, borrowings under our available credit
facilities and the net proceeds from our initial public
offering. However, if our stores are not profitable or if our
store profits decline, we may not have the cash flow necessary
in order to pursue or maintain our growth strategy. We may also
be unable to obtain any necessary financing on commercially
reasonable terms to pursue or maintain our growth strategy. If
we are unable to pursue or maintain our growth strategy, the
market price of our common stock could decline and our results
of operations and profitability could suffer.
Our
ability to attract customers to our stores depends heavily on
successfully locating our stores in suitable locations and any
impairment of a store location, including any decrease in
customer traffic, could cause our sales to be less than
expected.
Our approach to identifying locations for our stores typically
favors street locations and lifestyle centers where we can be a
part of the community. As a result, our stores are typically
located near retailers or fitness facilities that we believe are
consistent with our customers lifestyle choices. Sales at
these stores are derived, in part, from the volume of foot
traffic in these locations. Store locations may become
unsuitable due to, and our sales volume and customer traffic
generally may be harmed by, among other things:
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economic downturns in a particular area;
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competition from nearby retailers selling athletic apparel;
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changing consumer demographics in a particular market;
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changing lifestyle choices of consumers in a particular
market; and
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the closing or decline in popularity of other businesses located
near our store.
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Changes in areas around our store locations that result in
reductions in customer foot traffic or otherwise render the
locations unsuitable could cause our sales to be less than
expected.
We
operate in a highly competitive market and the size and
resources of some of our competitors may allow them to compete
more effectively than we can, resulting in a loss of our market
share and a decrease in our net revenue and
profitability.
The market for technical athletic apparel is highly competitive.
Competition may result in pricing pressures, reduced profit
margins or lost market share or a failure to grow our market
share, any of which could substantially harm our business and
results of operations. We compete directly against wholesalers
and direct retailers of athletic apparel, including large,
diversified apparel companies with substantial market share and
established companies expanding their production and marketing
of technical athletic apparel, as well as against retailers
specifically focused on womens athletic apparel. We also
face competition from wholesalers and direct retailers of
traditional commodity athletic apparel, such as cotton T-shirts
and sweatshirts. Many of our competitors are large apparel and
sporting goods companies with strong worldwide brand
recognition, such as Nike, Inc. and adidas AG, which includes
the adidas and Reebok brands. Because of the fragmented nature
of the industry, we also compete with other apparel sellers,
including those specializing in yoga apparel. Many of our
competitors have significant competitive advantages, including
longer operating histories, larger and broader customer bases,
more established relationships with a broader set of suppliers,
greater brand recognition and greater financial, research and
development, marketing, distribution and other resources than we
do. In addition, our technical athletic apparel is sold at a
premium to traditional athletic apparel.
Our competitors may be able to achieve and maintain brand
awareness and market share more quickly and effectively than we
can. In contrast to our grassroots marketing
approach, many of our competitors promote their brands primarily
through traditional forms of advertising, such as print media
and television commercials, and through celebrity athlete
endorsements, and have substantial resources to devote to such
efforts. Our competitors may also create and maintain brand
awareness using traditional forms of advertising more quickly in
new markets than we can. Our competitors may also be able to
increase sales in their new and existing markets faster than we
do
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by emphasizing different distribution channels than we do, such
as wholesale, internet or catalog sales or an extensive
franchise network, as opposed to distribution through retail
stores, and many of our competitors have substantial resources
to devote toward increasing sales in such ways.
In addition, because we own no patents or exclusive intellectual
property rights in the technology, fabrics or processes
underlying our products, our current and future competitors are
able to manufacture and sell products with performance
characteristics, fabrication techniques and styling similar to
our products.
Our
inability to maintain recent levels of comparable store sales or
average sales per square foot could cause our stock price to
decline.
We may not be able to maintain the levels of comparable store
sales that we have experienced historically. In addition, we may
not be able to replicate outside of North America our historic
average sales per square foot. Our sales per square foot in
stores we have opened in the United States have generally been
lower than those we have been able to achieve in Canada. As
sales in the United States grow to become a larger percentage of
our overall sales, our average sales per square foot will likely
decline. The aggregate results of operations of our stores have
fluctuated in the past and can be expected to continue to
fluctuate in the future. For example, over the past eight fiscal
quarters, our quarterly comparable store sales have ranged from
a decrease of 22% in the fourth quarter of fiscal 2008 to an
increase of 41% in the fourth quarter of fiscal 2007. A variety
of factors affect both comparable store sales and average sales
per square foot, including foreign exchange fluctuations,
fashion trends, competition, current economic conditions,
pricing, inflation, the timing of the release of new merchandise
and promotional events, changes in our merchandise mix, the
success of marketing programs and weather conditions. These
factors may cause our comparable store sales results to be
materially lower than recent periods and our expectations, which
could harm our results of operations and result in a decline in
the price of our common stock.
Failure
to comply with trade and other regulations could lead to
investigations or actions by government regulators and negative
publicity.
The labeling, distribution, importation and sale of our products
are subject to extensive regulation by various federal agencies,
including the Federal Trade Commission, or FTC, state attorneys
general in the U.S., the Competition Bureau and Health Canada in
Canada as well as by various other federal, state, provincial,
local and international regulatory authorities in the countries
in which our products are distributed or sold. If we fail to
comply with those regulations, we could become subject to
significant penalties or claims, which could harm our results of
operations or our ability to conduct our business. In addition,
the adoption of new regulations or changes in the interpretation
of existing regulations may result in significant compliance
costs or discontinuation of product sales and may impair the
marketing of our products, resulting in significant loss of net
sales.
In addition, our failure to comply with FTC or state
regulations, or with regulations in foreign markets that cover
our product claims and advertising, including direct claims and
advertising by us, may result in enforcement actions and
imposition of penalties or otherwise harm the distribution and
sale of our products.
Our
plans to improve and expand our product offerings may not be
successful, and implementation of these plans may divert our
operational, managerial and administrative resources, which
could harm our competitive position and reduce our net revenue
and profitability.
In addition to our store expansion strategy, we plan to grow our
business by improving and expanding our product offerings, which
includes introducing new product technologies, increasing the
range of athletic activities our products target, growing our
mens business and expanding our accessories, undergarments
and outerwear offerings. The principal risks to our ability to
successfully carry out our plans to improve and expand our
product offering are that:
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introduction of new products may be delayed, allowing our
competitors to introduce similar products in a more timely
fashion, which could hurt our goal to be viewed as a leader in
technical athletic apparel innovation;
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if our expanded product offerings fail to maintain and enhance
our distinctive brand identity, our brand image may be
diminished and our sales may decrease;
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implementation of these plans may divert managements
attention from other aspects of our business and place a strain
on our management, operational and financial resources, as well
as our information systems; and
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incorporation of novel technologies into our products that are
not accepted by our customers or that are inferior to similar
products offered by our competitors.
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In addition, our ability to successfully carry out our plans to
improve and expand our product offerings may be affected by
economic and competitive conditions, changes in consumer
spending patterns and changes in consumer athletic preferences
and style trends. These plans could be abandoned, could cost
more than anticipated and could divert resources from other
areas of our business, any of which could impact our competitive
position and reduce our net revenue and profitability.
We
rely on third-party suppliers to provide fabrics for and to
produce our products, and we have limited control over them and
may not be able to obtain quality products on a timely basis or
in sufficient quantity.
We do not manufacture our products or the raw materials for them
and rely instead on third-party suppliers. Many of the specialty
fabrics used in our products are technically advanced textile
products developed and manufactured by third parties and may be
available, in the short-term, from only one or a very limited
number of sources. For example, our Luon fabric, which is
included in many of our products, is supplied to the mills we
use by a single manufacturer in Taiwan, and the fibers used in
manufacturing our Luon fabric are supplied to our Taiwanese
manufacturer by a single company. In fiscal 2008, approximately
70% of our products were produced by our top five manufacturing
suppliers.
If we experience significant increased demand, or need to
replace an existing manufacturer, there can be no assurance that
additional supplies of fabrics or raw materials or additional
manufacturing capacity will be available when required on terms
that are acceptable to us, or at all, or that any supplier or
manufacturer would allocate sufficient capacity to us in order
to meet our requirements or fill our orders in a timely manner.
Even if we are able to expand existing or find new manufacturing
or fabric sources, we may encounter delays in production and
added costs as a result of the time it takes to train our
suppliers and manufacturers in our methods, products and quality
control standards. Delays related to supplier changes could also
arise due to an increase in shipping times if new suppliers are
located farther away from our markets or from other participants
in our supply chain. Any delays, interruption or increased costs
in the supply of fabric or manufacture of our products could
have an adverse effect on our ability to meet customer demand
for our products and result in lower net revenue and income from
operations both in the short and long term.
In addition, there can be no assurance that our suppliers and
manufacturers will continue to provide fabrics and raw materials
or manufacture products that comply with our technical
specifications and are consistent with our standards. We have
occasionally received, and may in the future continue to
receive, shipments of products that fail to comply with our
technical specifications or that fail to conform to our quality
control standards. In that event, unless we are able to obtain
replacement products in a timely manner, we risk the loss of net
revenue resulting from the inability to sell those products and
related increased administrative and shipping costs.
Additionally, if defects in the manufacture of our products are
not discovered until after such products are purchased by our
customers, our customers could lose confidence in the technical
attributes of our products and our results of operations could
suffer and our business may be harmed.
We do
not have long-term contracts with our suppliers and accordingly
could face significant disruptions in supply from our current
sources.
We generally do not enter into long-term formal written
agreements with our suppliers, including those for Luon, and
typically transact business with our suppliers on an
order-by-order
basis. There can be no assurance that there will not be a
significant disruption in the supply of fabrics or raw materials
from current sources or, in the event of a disruption, that we
would be able to locate alternative suppliers of materials of
comparable quality at an acceptable price, or at all.
Identifying a suitable supplier is an involved process that
requires us to become satisfied with their quality control,
responsiveness and service, financial stability and labor and
other ethical practices. Any
14
delays, interruption or increased costs in the supply of fabric
or manufacture of our products arising from a lack of long-term
contracts could have an adverse effect on our ability to meet
customer demand for our products and result in lower net revenue
and income from operations both in the short and long term.
We do
not have patents or exclusive intellectual property rights in
our fabrics and manufacturing technology. If our competitors
sell similar products to ours, our net revenue and profitability
could suffer.
The intellectual property rights in the technology, fabrics and
processes used to manufacture our products are owned or
controlled by our suppliers and are generally not unique to us.
Our ability to obtain intellectual property protection for our
products is therefore limited and we currently own no patents or
exclusive intellectual property rights in the technology,
fabrics or processes underlying our products. As a result, our
current and future competitors are able to manufacture and sell
products with performance characteristics, fabrications and
styling similar to our products. Because many of our
competitors, such as Nike, Inc. and adidas AG, which includes
the adidas and Reebok brands, have significantly greater
financial, distribution, marketing and other resources than we
do, they may be able to manufacture and sell products based on
our fabrics and manufacturing technology at lower prices than we
can. If our competitors do sell similar products to ours at
lower prices, our net revenue and profitability could suffer.
Our
future success is substantially dependent on the continued
service of our senior management.
Our future success is substantially dependent on the continued
service of our senior management. The loss of the services of
our senior management could make it more difficult to
successfully operate our business and achieve our business goals.
We also may be unable to retain existing management, technical,
sales and client support personnel that are critical to our
success, which could result in harm to our customer and employee
relationships, loss of key information, expertise or know-how
and unanticipated recruitment and training costs.
We do not maintain a key person life insurance policy on
Mr. Wilson, Ms. Day or any of our other members of our
senior management team. As a result, we would have no way to
cover the financial loss if we were to lose the services of
members of our senior management team.
Problems
with our distribution system could harm our ability to meet
customer expectations, manage inventory, complete sales and
achieve objectives for operating efficiencies.
We rely on our distribution facility in Vancouver, British
Columbia and a distribution center located in Renton, Washington
operated by a third-party vendor for substantially all of our
product distribution. In October 2007, we relocated our
Vancouver distribution facility to a new, larger distribution
facility. Our contract for the Renton, Washington distribution
facility expires in April 2010 and there can be no assurance
that we will be able to enter into another contract for a
distribution center on acceptable terms. Such an event could
disrupt our operations. Our distribution facilities include
computer controlled and automated equipment, which means their
operations are complicated and may be subject to a number of
risks related to security or computer viruses, the proper
operation of software and hardware, electronic or power
interruptions or other system failures. In addition, because
substantially all of our products are distributed from two
locations, our operations could also be interrupted by labor
difficulties, or by floods, fires or other natural disasters
near our distribution centers. If we encounter problems with our
distribution system, our ability to meet customer expectations,
manage inventory, complete sales and achieve objectives for
operating efficiencies could be harmed.
Our
operating results are subject to seasonal and quarterly
variations in our net revenue and income from operations, which
could cause the price of our common stock to
decline.
We have experienced, and expect to continue to experience,
significant seasonal variations in our net revenue and income
from operations. Seasonal variations in our net revenue are
primarily related to increased sales of our products during our
fiscal fourth quarter, reflecting our historical strength in
sales during the holiday season. We generated approximately 29%,
39% and 35% of our full year gross profit during the fourth
quarters of fiscal 2008, fiscal 2007 and fiscal 2006
respectively. Historically, seasonal variations in our income
from operations have been driven principally by increased net
revenue in our fiscal fourth quarter.
15
Our quarterly results of operations may also fluctuate
significantly as a result of a variety of other factors,
including, among other things, the following:
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the timing of new store openings;
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net revenue and profits contributed by new stores;
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increases or decreases in comparable store sales;
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changes in our product mix; and
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the timing of new advertising and new product introductions.
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As a result of these seasonal and quarterly fluctuations, we
believe that comparisons of our operating results between
different quarters within a single fiscal year are not
necessarily meaningful and that these comparisons cannot be
relied upon as indicators of our future performance.
Any future seasonal or quarterly fluctuations in our results of
operations may not match the expectations of market analysts and
investors. Disappointing quarterly results could cause the price
of our common stock to decline. Seasonal or quarterly factors in
our business and results of operations may also make it more
difficult for market analysts and investors to assess the
longer-term profitability and strength of our business at any
particular point, which could lead to increased volatility in
our stock price. Increased volatility could cause our stock
price to suffer in comparison to less volatile investments.
If we
are unable to accurately forecast customer demand for our
products our manufacturers may not be able to deliver products
to meet our requirements, and this could result in delays in the
shipment of products to our stores and may harm our results of
operations and customer relationships.
We stock our stores based on our estimates of future demand for
particular products. If our inventory and planning team fails to
accurately forecast customer demand, we may experience excess
inventory levels or a shortage of products available for sale in
our stores. There can be no assurance that we will be able to
successfully manage our inventory at a level appropriate for
future customer demand.
Inventory levels in excess of customer demand may result in
inventory write-downs or write-offs and the sale of excess
inventory at discounted prices, which would cause our gross
margin to suffer and could impair the strength and exclusivity
of our brand. We wrote-off $0.9 million, $0.8 million
and $1.0 million of inventory in fiscal 2008, fiscal 2007
and fiscal 2006, respectively. In addition, if we underestimate
customer demand for our products, our manufacturers may not be
able to deliver products to meet our requirements, and this
could result in delays in the shipment of products to our stores
and may damage our reputation and customer relationships. There
can be no assurance that we will be able to successfully manage
our inventory at a level appropriate for future customer demand.
Our
current and future joint ventures may not be
successful.
As part of our long-term growth strategy, we plan to expand our
stores and sales of our products into new locations outside
North America. Our successful expansion and operation of new
stores outside North America will depend on our ability to find
suitable partners and to successfully implement and manage joint
venture relationships. If we are able to find a joint venture
partner in a specific geographic area, there can be no guarantee
that such a relationship will be successful. Such a relationship
often creates additional risk. For example, our partners in
joint venture relationships may have interests that differ from
ours or that conflict with ours, such as the timing of new store
openings and the pricing of our products, or our partners may
become bankrupt which may as a practical matter subject us to
such partners liabilities in connection with the joint
venture. In addition, joint ventures can magnify several other
risks for us, including the potential loss of control over our
cultural identity in the markets where we enter into joint
ventures and the possibility that our brand image could be
impaired by the actions of our partners. Although we generally
will seek to maintain sufficient control of any joint venture to
permit our objectives to be achieved, we might not be able to
take action without the approval of our partners. Reliance on
joint venture relationships and our partners exposes us to
increased risk that our joint ventures will not be successful
and will result in competitive harm to our brand image that
could cause our expansion efforts, profitability and results of
operations to suffer.
16
We may
need to raise additional capital that may be required to grow
our business, and we may not be able to raise capital on terms
acceptable to us or at all.
Operating our business and maintaining our growth efforts will
require significant cash outlays and advance capital
expenditures and commitments. If cash on hand and cash generated
from operations and from our initial public offering are not
sufficient to meet our cash requirements, we will need to seek
additional capital, potentially through debt or equity
financings, to fund our growth. We cannot assure you that we
will be able to raise needed cash on terms acceptable to us or
at all. Financings may be on terms that are dilutive or
potentially dilutive to our stockholders, and the prices at
which new investors would be willing to purchase our securities
may be lower than the current price per share of our common
stock. The holders of new securities may also have rights,
preferences or privileges which are senior to those of existing
holders of common stock. If new sources of financing are
required, but are insufficient or unavailable, we will be
required to modify our growth and operating plans based on
available funding, if any, which would harm our ability to grow
our business.
We are
subject to risks associated with leasing retail space subject to
long-term non-cancelable leases and are required to make
substantial lease payments under our operating leases, and any
failure to make these lease payments when due would likely harm
our business, profitability and results of
operations.
We do not own any of our stores, but instead lease all of our
corporate-owned stores under operating leases. Our leases
generally have initial terms of between five and 10 years,
and generally can be extended only in five-year increments if at
all. All of our leases require a fixed annual rent, and most
require the payment of additional rent if store sales exceed a
negotiated amount. Generally, our leases are net
leases, which require us to pay all of the cost of insurance,
taxes, maintenance and utilities. We generally cannot cancel
these leases at our option. Payments under these operating
leases account for a significant portion of our cost of goods
sold. For example, as of February 1, 2009, we were a party
to operating leases associated with our corporate-owned stores
as well as other corporate facilities requiring future minimum
lease payments aggregating $118.6 million through
January 31, 2014 and approximately $93.0 million
thereafter. We expect that any new stores we open will also be
leased by us under operating leases, which will further increase
our operating lease expenses.
Our substantial operating lease obligations could have
significant negative consequences, including:
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increasing our vulnerability to general adverse economic and
industry conditions;
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limiting our ability to obtain additional financing;
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requiring a substantial portion of our available cash to pay our
rental obligations, thus reducing cash available for other
purposes;
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limiting our flexibility in planning for or reacting to changes
in our business or in the industry in which we compete; and
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placing us at a disadvantage with respect to some of our
competitors.
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We depend on cash flow from operations to pay our lease expenses
and to fulfill our other cash needs. If our business does not
generate sufficient cash flow from operating activities, and
sufficient funds are not otherwise available to us from
borrowings under our available credit facilities or from other
sources, we may not be able to service our operating lease
expenses, grow our business, respond to competitive challenges
or to fund our other liquidity and capital needs, which would
harm our business.
If our
independent manufacturers fail to use ethical business practices
and comply with applicable laws and regulations, our brand image
could be harmed due to negative publicity.
Our core values, which include developing the highest quality
products while operating with integrity, are an important
component of our brand image, which makes our reputation
particularly sensitive to allegations of unethical business
practices. While our internal and vendor operating guidelines
promote ethical business practices such as environmental
responsibility, fair wage practices, and compliance with child
labor laws, among others, and we, along with a third party that
we retain for this purpose, monitor compliance with those
guidelines, we do not control our independent manufacturers or
their business practices. Accordingly, we cannot guarantee their
17
compliance with our guidelines. A lack of demonstrated
compliance could lead us to seek alternative suppliers, which
could increase our costs and result in delayed delivery of our
products, product shortages or other disruptions of our
operations.
Violation of labor or other laws by our independent
manufacturers or the divergence of an independent
manufacturers labor or other practices from those
generally accepted as ethical in Canada, the United States or
other markets in which we do business could also attract
negative publicity for us and our brand. This could diminish the
value of our brand image and reduce demand for our merchandise
if, as a result of such violation, we were to attract negative
publicity. Other apparel manufacturers have encountered
significant problems in this regard, and these problems have
resulted in organized boycotts of their products and significant
adverse publicity. If we, or other manufacturers in our
industry, encounter similar problems in the future, it could
harm our brand image, stock price and results of operations.
Monitoring compliance by independent manufacturers is
complicated by the fact that expectations of ethical business
practices continually evolve, may be substantially more
demanding than applicable legal requirements and are driven in
part by legal developments and by diverse groups active in
publicizing and organizing public responses to perceived ethical
shortcomings. Accordingly, we cannot predict how such
expectations might develop in the future and cannot be certain
that our guidelines would satisfy all parties who are active in
monitoring and publicizing perceived shortcomings in labor and
other business practices worldwide.
The
cost of raw materials could increase our cost of goods sold and
cause our results of operations and financial condition to
suffer.
The fabrics used by our suppliers and manufacturers include
synthetic fabrics whose raw materials include petroleum-based
products. Our products also include natural fibers, including
cotton. Significant price fluctuations or shortages in petroleum
or other raw materials may increase our cost of goods sold and
cause our results of operations and financial condition to
suffer.
Because
a significant portion of our sales are generated in Canada,
fluctuations in foreign currency exchange rates have negatively
affected our results of operations and may continue to do so in
the future.
The reporting currency for our consolidated financial statements
is the U.S. dollar. In the future, we expect to continue to
derive a significant portion of our sales and incur a
significant portion of our operating costs in Canada, and
changes in exchange rates between the Canadian dollar and the
U.S. dollar may have a significant, and potentially
adverse, effect on our results of operations. Our primary risk
of loss regarding foreign currency exchange rate risk is caused
by fluctuations in the exchange rates between the
U.S. dollar, Canadian dollar and Australian dollar. Because
we recognize net revenue from sales in Canada in Canadian
dollars, if the Canadian dollar weakens against the
U.S. dollar it would have a negative impact on our Canadian
operating results upon translation of those results into
U.S. dollars for the purposes of consolidation. The
exchange rate of the Canadian dollar against the
U.S. dollar has declined over fiscal 2008, which has
negatively affected our results of operations. If the
Canadian dollar continues to weaken relative to the
U.S. dollar, our net revenue will decline and our income
from operations and net income will be adversely affected. We
have not historically engaged in hedging transactions and do not
currently contemplate engaging in hedging transactions to
mitigate foreign exchange risks. As we continue to recognize
gains and losses in foreign currency transactions, depending
upon changes in future currency rates, such gains or losses
could have a significant, and potentially adverse, effect on our
results of operations.
The
operations of many of our suppliers are subject to additional
risks that are beyond our control and that could harm our
business, financial condition and results of
operations.
Almost all of our suppliers are located outside the United
States. During fiscal 2008, approximately 15% of our products
were produced in Canada, approximately 65% in China,
approximately 7% in Southeast Asia and the remainder in the
United States, Israel, Peru, Korea and Taiwan. As a result of
our international suppliers, we are subject to risks associated
with doing business abroad, including:
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political unrest, terrorism, labor disputes and economic
instability resulting in the disruption of trade from foreign
countries in which our products are manufactured;
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the imposition of new laws and regulations, including those
relating to labor conditions, quality and safety standards,
imports, duties, taxes and other charges on imports, as well as
trade restrictions and restrictions on currency exchange or the
transfer of funds;
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reduced protection for intellectual property rights, including
trademark protection, in some countries, particularly China;
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disruptions or delays in shipments; and
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changes in local economic conditions in countries where our
manufacturers, suppliers or customers are located.
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These and other factors beyond our control could interrupt our
suppliers production in offshore facilities, influence the
ability of our suppliers to export our products cost-effectively
or at all and inhibit our suppliers ability to procure
certain materials, any of which could harm our business,
financial condition and results of operations.
Our
ability to source our merchandise profitably or at all could be
hurt if new trade restrictions are imposed or existing trade
restrictions become more burdensome.
The United States and the countries in which our products are
produced or sold internationally have imposed and may impose
additional quotas, duties, tariffs, or other restrictions or
regulations, or may adversely adjust prevailing quota, duty or
tariff levels. For example, under the provisions of the World
Trade Organization, or WTO, Agreement on Textiles and Clothing,
effective as of January 1, 2005, the United States and
other WTO member countries eliminated quotas on textiles and
apparel-related products from WTO member countries. In 2005,
Chinas exports into the United States surged as a result
of the eliminated quotas. In response to the perceived
disruption of the market, the United States imposed new quotas,
which were permitted to remain in place through the end of 2008,
on certain categories of natural-fiber products that we import
from China. As a result, we have expanded our relationships with
suppliers outside of China, which among other things has
resulted in increased costs and shipping times for some
products. Countries impose, modify and remove tariffs and other
trade restrictions in response to a diverse array of factors,
including global and national economic and political conditions,
which make it impossible for us to predict future developments
regarding tariffs and other trade restrictions. Trade
restrictions, including tariffs, quotas, embargoes, safeguards
and customs restrictions, could increase the cost or reduce the
supply of products available to us or may require us to modify
our supply chain organization or other current business
practices, any of which could harm our business, financial
condition and results of operations.
We may
be subject to potential challenges relating to overtime pay and
other regulations that impact our employees, which could cause
our business, financial condition, results of operations or cash
flows to suffer.
Various labor laws, including U.S. federal, U.S. state
and Canadian provincial laws, among others, govern our
relationship with our employees and affect our operating costs.
These laws include minimum wage requirements, overtime pay,
unemployment tax rates, workers compensation rates and
citizenship requirements. These laws change frequently and may
be difficult to interpret and apply. In particular, as a
retailer, we may be subject to challenges regarding the
application of overtime and related pay regulations to our
employees. A determination that we do not comply with these laws
could harm our brand image, business, financial condition and
results of operation. Additional government-imposed increases in
minimum wages, overtime pay, paid leaves of absence or mandated
health benefits could also cause our business, financial
condition, results of operations or cash flows to suffer.
Our
franchisees may take actions that could harm our business or
brand, and franchise regulations and contracts limit our ability
to terminate or replace under-performing
franchises.
As of February 1, 2009, we had one franchise store in
Canada, four franchise stores in the United States and five
franchise stores in Australia. Franchisees are independent
business operators and are not our employees, and we do not
exercise control over the day-to-day operations of their retail
stores. We provide training and support to franchisees, and set
and monitor operational standards, but the quality of franchise
store operations may decline due to diverse factors beyond our
control. For example, franchisees may not successfully operate
stores in a manner
19
consistent with our standards and requirements, or may not hire
and train qualified employees, which could harm their sales and
as a result harm our results of operations or cause our brand
image to suffer.
Franchisees, as independent business operators, may from time to
time disagree with us and our strategies regarding the business
or our interpretation of our respective rights and obligations
under applicable franchise agreements. This may lead to disputes
with our franchisees, and we expect such disputes to occur from
time to time, such as the collection of royalty payments or
other matters related to the franchisees successful
operation of the retail store. Such disputes could divert the
attention of our management and our franchisees from our
operations, which could cause our business, financial condition,
results of operations or cash flows to suffer.
In addition, as a franchisor, we are subject to Canadian,
U.S. federal, U.S. state and international laws
regulating the offer and sale of franchises. These laws impose
registration and extensive disclosure requirements on the offer
and sale of franchises, frequently apply substantive standards
to the relationship between franchisor and franchisee and limit
the ability of a franchisor to terminate or refuse to renew a
franchise. We may therefore be required to retain an
under-performing franchise and may be unable to replace the
franchisee, which could harm our results of operations. We
cannot predict the nature and effect of any future legislation
or regulation on our franchise operations.
Our
failure or inability to protect our intellectual property rights
could diminish the value of our brand and weaken our competitive
position.
We currently rely on a combination of copyright, trademark,
trade dress and unfair competition laws, as well as
confidentiality procedures and licensing arrangements, to
establish and protect our intellectual property rights. We
cannot assure you that the steps taken by us to protect our
intellectual property rights will be adequate to prevent
infringement of such rights by others, including imitation of
our products and misappropriation of our brand. In addition,
intellectual property protection may be unavailable or limited
in some foreign countries where laws or law enforcement
practices may not protect our intellectual property rights as
fully as in the United States or Canada, and it may be more
difficult for us to successfully challenge the use of our
intellectual property rights by other parties in these
countries. If we fail to protect and maintain our intellectual
property rights, the value of our brand could be diminished and
our competitive position may suffer.
Our
trademarks and other proprietary rights could potentially
conflict with the rights of others and we may be prevented from
selling some of our products.
Our success depends in large part on our brand image. We believe
that our trademarks and other proprietary rights have
significant value and are important to identifying and
differentiating our products from those of our competitors and
creating and sustaining demand for our products. We have
obtained and applied for some United States and foreign
trademark registrations, and will continue to evaluate the
registration of additional trademarks as appropriate. However,
we cannot guarantee that any of our pending trademark
applications will be approved by the applicable governmental
authorities. Moreover, even if the applications are approved,
third parties may seek to oppose or otherwise challenge these
registrations. Additionally, we cannot assure you that obstacles
will not arise as we expand our product line and the geographic
scope of our sales and marketing. Third parties may assert
intellectual property claims against us, particularly as we
expand our business and the number of products we offer. Our
defense of any claim, regardless of its merit, could be
expensive and time consuming and could divert management
resources. Successful infringement claims against us could
result in significant monetary liability or prevent us from
selling some of our products. In addition, resolution of claims
may require us to redesign our products, license rights from
third parties or cease using those rights altogether. Any of
these events could harm our business and cause our results of
operations, liquidity and financial condition to suffer.
We
will continue to incur significant expenses as a result of being
a public company, which will negatively impact our financial
performance and could cause our results of operations and
financial condition to suffer.
We will continue to incur significant legal, accounting,
insurance and other expenses as a result of being a public
company. We expect that compliance with the Sarbanes-Oxley Act
of 2002, as well as related rules implemented by the SEC and the
securities regulators in each of the provinces and territories
of Canada and by The Nasdaq Stock Market LLC, will continue to
impact our expenses, including our legal and accounting costs,
and
20
make some activities more time consuming and costly. We also
expect these laws, rules and regulations to make it more
expensive for us to obtain director and officer liability
insurance, and we may be required to accept reduced policy
limits and coverage or incur substantially higher costs to
obtain the same or similar coverage. As a result, it may be more
difficult for us to attract and retain qualified persons to
serve on our board of directors or as officers. As a result of
the foregoing, we have experienced a substantial increase in
legal, accounting, insurance and certain other expenses and we
expect we will incur higher expenses in the future, which will
negatively impact our financial performance and could cause our
results of operations and financial condition to suffer.
Failure
to maintain adequate financial and management processes and
controls could lead to errors in our financial reporting, which
could harm our business and cause a decline in our stock
price.
Ongoing reporting obligations as a public company and our
continued growth are likely to place a considerable strain on
our financial and management systems, processes and controls, as
well as on our personnel. In addition, as a public company we
are required to document and test our internal controls over
financial reporting pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002 so that our management can certify
the effectiveness of our internal controls and our independent
registered public accounting firm can render an opinion on our
internal control over financial reporting on an annual basis. As
a result, we have implemented the required financial and
managerial controls, reporting systems and procedures and we
incurred substantial expenses to test our systems and to make
additional improvements and to hire additional personnel. If our
management is unable to certify the effectiveness of our
internal controls or if our independent registered public
accounting firm cannot render an opinion on the effectiveness of
our internal control over financial reporting, or if material
weaknesses in our internal controls are identified, we could be
subject to regulatory scrutiny and a loss of public confidence,
which could harm our business and cause a decline in our stock
price. In addition, if we do not maintain adequate financial and
management personnel, processes and controls, we may not be able
to accurately report our financial performance on a timely
basis, which could cause a decline in our stock price and harm
our ability to raise capital. Failure to accurately report our
financial performance on a timely basis could also jeopardize
our continued listing on the Nasdaq Global Select Market, the
Toronto Stock Exchange or any other stock exchange on which our
common stock may be listed. Delisting of our common stock on any
exchange would reduce the liquidity of the market for our common
stock, which would reduce the price of our stock and increase
the volatility of our stock price.
Risks
Related to Our Common Stock
Our
stock price has been volatile and your investment in our common
stock could suffer a decline in value.
The market price of our common stock has been subject to
significant fluctuations and may continue to fluctuate or
decline. Since our initial public offering in July 2007 until
February 1, 2009, the price of our common stock has ranged
from a low of $6.22 to a high of $60.70 on the Nasdaq Global
Select Market and from a low of CDN $7.83 to a high of CDN
$58.77 on the Toronto Stock Exchange. Broad market and industry
factors may harm the price of our common stock, regardless of
our actual operating performance. Factors that could cause
fluctuation in the price of our common stock may include, among
other things:
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actual or anticipated fluctuations in quarterly operating
results or other operating metrics, such as comparable store
sales, that may be used by the investment community;
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changes in financial estimates by us or by any securities
analysts who might cover our stock;
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reductions in consumer spending and macroeconomic factors that
may adversely affect consumer spending;
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speculation about our business in the press or the investment
community;
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conditions or trends affecting our industry or the economy
generally, including fluctuations in foreign currency exchange
rates;
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stock market price and volume fluctuations of other publicly
traded companies and, in particular, those that are in the
technical athletic apparel industry;
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announcements by us or our competitors of new products,
significant acquisitions, strategic partnerships or divestitures;
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changes in product mix between high and low margin products;
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capital commitments;
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our entry into new markets;
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timing of new store openings;
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percentage of sales from new stores versus established stores;
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additions or departures of key personnel;
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actual or anticipated sales of our common stock, including sales
by our directors, officers or significant stockholders;
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significant developments relating to our manufacturing,
distribution, joint venture or franchise relationships;
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customer purchases of new products from us and our competitors;
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investor perceptions of the apparel industry in general and our
company in particular;
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changes in accounting standards, policies, guidance,
interpretation or principles; and
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speculative trading of our common stock in the investment
community.
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In the past, securities class action litigation has often been
instituted against companies following periods of volatility in
their stock price. This type of litigation, even if it does not
result in liability for us, could result in substantial costs to
us and divert managements attention and resources.
A
significant number of our outstanding shares are eligible for
resale and may be sold on the Nasdaq Global Select Market and
the Toronto Stock Exchange. The large number of shares eligible
for public sale could depress the market price of our common
stock.
The market price of our common stock could decline as a result
of sales of a large number of shares of our common stock in the
market, and the perception that these sales could occur may also
depress the market price of our common stock. On July 31,
2008, we filed a registration statement on Form S-3ASR in
the United States registering the issuance of up to
20,935,041 shares of our common stock upon the exchange of
the then-outstanding exchangeable shares of Lulu Canadian
Holding, Inc. Sales of our common stock in the public market may
make it more difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate. These
sales also could cause our stock price to fall and make it more
difficult for you to sell shares of our common stock.
Our
principal stockholders and management own a significant
percentage of our stock and will be able to exercise significant
influence over our affairs.
Our current directors and executive officers beneficially own
42% of our common stock. As a result, these stockholders, if
acting together, would be able to influence or control matters
requiring approval by our stockholders, including the election
of directors and the approval of mergers, acquisitions or other
extraordinary transactions. They may also have interests that
differ from yours and may vote in a way with which you disagree
and which may be adverse to your interests. This concentration
of ownership may have the effect of delaying, preventing or
deterring a change of control of our company, could deprive our
stockholders of an opportunity to receive a premium for their
common stock as part of a sale of our company and might
ultimately affect the market price of our common stock.
Anti-takeover
provisions of Delaware law and our certificate of incorporation
and bylaws could delay and discourage takeover attempts that
stockholders may consider to be favorable.
Certain provisions of our certificate of incorporation and
bylaws and applicable provisions of the Delaware General
Corporation Law may make it more difficult or impossible for a
third party to acquire control of us or effect a change in our
board of directors and management. These provisions include:
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the classification of our board of directors into three classes,
with one class elected each year;
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22
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prohibiting cumulative voting in the election of directors;
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|
the ability of our board of directors to issue preferred stock
without stockholder approval;
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the ability to remove a director only for cause and only with
the vote of the holders of at least
662/3%
of our voting stock;
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a special meeting of stockholders may only be called by our
chairman or Chief Executive Officer, or upon a resolution
adopted by an affirmative vote of a majority of the board of
directors, and not by our stockholders;
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prohibiting stockholder action by written consent; and
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our stockholders must comply with advance notice procedures in
order to nominate candidates for election to our board of
directors or to place stockholder proposals on the agenda for
consideration at any meeting of our stockholders.
|
In addition, we are governed by Section 203 of the Delaware
General Corporation Law which, subject to some specified
exceptions, prohibits business combinations between
a Delaware corporation and an interested
stockholder, which is generally defined as a stockholder
who becomes a beneficial owner of 15% or more of a Delaware
corporations voting stock, for a three-year period
following the date that the stockholder became an interested
stockholder. Section 203 could have the effect of delaying,
deferring or preventing a change in control that our
stockholders might consider to be in their best interests.
Our principal executive and administrative offices are located
at 2285 Clark Drive, Vancouver, British Columbia, Canada, V5N
3G9. We expect that our current administrative offices are
sufficient for our expansion plans for the foreseeable future.
We currently operate one distribution center located in
Vancouver, British Columbia, capable of accommodating our
expansion plans through the foreseeable future.
The general location, use, approximate size and lease renewal
date of our properties, none of which is owned by us, are set
forth below:
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|
Approximate
|
|
|
|
|
Location
|
|
Use
|
|
Square Feet
|
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|
Lease Renewal Date
|
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|
Vancouver, BC
|
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Executive and Administrative Offices
|
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|
30,000
|
|
|
|
January 2012
|
|
Vancouver, BC
|
|
Distribution Center
|
|
|
74,000
|
|
|
|
November 2017
|
|
As of February 1, 2009, we leased approximately
295,000 gross square feet relating to our 103
corporate-owned stores. Our leases generally have initial terms
of between five and 10 years, and generally can be extended
only in five-year increments, if at all. All of our leases
require a fixed annual rent, and most require the payment of
additional rent if store sales exceed a negotiated amount.
Generally, our leases are net leases, which require
us to pay all of the cost of insurance, taxes, maintenance and
utilities. We generally cannot cancel these leases at our option.
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ITEM 3.
|
LEGAL
PROCEEDINGS
|
Brian Bacon, a former employee, filed suit against the Company
in the Supreme Court of British Columbia, Canada on May 6,
2008. In the action, captioned Brian Bacon v. Lululemon
Athletica Canada Inc., Case No. S083254, Mr. Bacon
claims that we terminated his employment contract without cause
and without reasonable notice resulting in breach of contract,
losses and damages. Mr. Bacon seeks damages in an
unspecified amount, plus costs and interest related primarily to
the loss from participation in the stockholder sponsored LIPO
USA awards. We believe this claim is without merit and are
vigorously defending against it.
We are a party to various other legal proceedings arising in the
ordinary course of our business, but we are not currently a
party to any legal proceeding that management believes would
have a material adverse effect on our consolidated financial
position or results of operations.
23
PART II
|
|
ITEM 5.
|
MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
|
Market
Information and Dividends
Our common stock is quoted on the Nasdaq Global Select Market
under the symbol LULU and on the Toronto Stock
Exchange under the symbol LLL. Prior to
July 27, 2007, there was no public market for our common
stock. The following table sets forth, for the periods
indicated, the high and low sales prices of our common stock
reported by the Nasdaq Global Select Market.
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Common Stock Price
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(Nasdaq Global Select
|
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Market)
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High
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Low
|
|
|
Fiscal Year Ending February 1, 2009
|
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|
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|
|
Fourth Quarter
|
|
$
|
12.34
|
|
|
$
|
6.22
|
|
Third Quarter
|
|
$
|
24.85
|
|
|
$
|
10.12
|
|
Second Quarter
|
|
$
|
36.63
|
|
|
$
|
22.02
|
|
First Quarter
|
|
$
|
35.31
|
|
|
$
|
21.72
|
|
Fiscal Year Ending February 3, 2008
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
51.94
|
|
|
$
|
25.00
|
|
Third Quarter
|
|
$
|
60.70
|
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|
$
|
28.70
|
|
Second Quarter (from July 27, 2007)
|
|
$
|
34.17
|
|
|
$
|
24.92
|
|
As of February 1, 2009, there were approximately 90 holders
of record of our common stock.
We have never declared or paid any cash dividends on our common
stock and do not anticipate paying any cash dividends on our
common stock in the foreseeable future. We anticipate that we
will retain all of our available funds for use in the operation
and expansion of our business. Any future determination as to
the payment of cash dividends will be at the discretion of our
board of directors and will depend on our financial condition,
operating results, current and anticipated cash needs, plans for
expansion and other factors that our board of directors
considers to be relevant. In addition, financial and other
covenants in any instruments or agreements that we enter into in
the future may restrict our ability to pay cash dividends on our
common stock.
Stock
Performance Graph
The graph set forth below compares the cumulative total
stockholder return on our common stock between July 27,
2007 (the date of our initial public offering) and
February 1, 2009, with the cumulative total return of
(i) the S&P 500 Index and (ii) S&P Apparel
Retail Index, over the same period. This graph assumes the
investment of $100 on July 27, 2007 in our common stock,
the S&P 500 Index and the S&P 500 Apparel Retail Index
and assumes the reinvestment of dividends, if any. The graph
assumes the initial value of our common stock on July 27,
2007 was the closing sales price of $28.00 per share.
The comparisons shown in the graph below are based on historical
data. We caution that the stock price performance showing in the
graph below is not necessarily indicative of, nor is it intended
to forecast, the potential
24
future performance of our common stock. Information used in the
graph was obtained from the Nasdaq Stock Market website, a
source believed to be reliable, but we are not responsible for
any errors or omissions in such information.
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27-Jul-07
|
|
|
3-Feb-08
|
|
|
1-Feb-09
|
|
|
lululemon athletica inc
|
|
$
|
100.00
|
|
|
$
|
124.64
|
|
|
$
|
24.29
|
|
S&P 500 Index
|
|
$
|
100.00
|
|
|
$
|
95.65
|
|
|
$
|
56.61
|
|
S&P Apparel Retail Index
|
|
$
|
100.00
|
|
|
$
|
87.67
|
|
|
$
|
53.70
|
|
Use of
Proceeds
Our initial public offering of common stock was effected through
a Registration Statement on
Form S-1
(File No. 333-142477),
which was declared effective by the Securities and Exchange
Commission on July 26, 2007. We sold 2,290,909 shares
of common stock in the offering and the selling stockholders
sold 18,639,091 shares of common stock in the offering,
including the over-allotment option. We did not receive any of
the proceeds from sales by the selling stockholders. We received
net proceeds of approximately $31.4 million from the
offering, and since August 2, 2007, the settlement date of
the offering, we have used all of the net proceeds for capital
expenditures, including new store openings, and inventory
purchases.
The following table provides information regarding our
repurchases of our common stock during our fiscal year ended
February 1, 2009:
Issuer
Purchase of Equity Securities
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|
|
|
|
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Maximum Number
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
of Shares that
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
May Yet Be
|
|
|
|
Total Number
|
|
|
Average
|
|
|
as Part of Publicly
|
|
|
Purchased Under
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced Plans
|
|
|
the Plans
|
|
Period(1)
|
|
Purchased
|
|
|
per Share
|
|
|
or Programs(2)
|
|
|
or Programs(2)
|
|
|
November 3, 2008 February 1, 2009
|
|
|
24,353
|
|
|
$
|
9.22
|
|
|
|
24,353
|
|
|
|
2,937,100
|
|
August 4, 2008 November 2, 2008
|
|
|
15,095
|
|
|
|
18.21
|
|
|
|
15,095
|
|
|
|
2,961,453
|
|
May 5, 2008 August 3, 2008
|
|
|
8,684
|
|
|
|
29.24
|
|
|
|
8,684
|
|
|
|
2,976,548
|
|
February 4, 2008 May 4, 2008
|
|
|
9,201
|
|
|
|
31.12
|
|
|
|
9,201
|
|
|
|
2,985,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
57,333
|
|
|
|
|
|
|
|
57,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Quarterly information is presented by reference to our fiscal
quarters during our fiscal year of 2008. |
25
|
|
|
(2) |
|
Our Employee Share Purchase Plan (ESPP) was approved by our
Board of Directors and stockholders in September 2007. All
shares purchased under the ESPP will be purchased on the Toronto
Stock Exchange or the Nasdaq Global Select Market (or such other
stock exchange as we may designate from time to time). Unless
our Board of Directors terminates the ESPP earlier, the ESPP
will continue until all shares authorized for purchase under the
ESPP have been purchased. The maximum number of shares available
for issuance under the ESPP is 3,000,000. |
|
|
ITEM 6.
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
The selected consolidated financial data set forth below are
derived from our consolidated financial statements and should be
read in conjunction with our consolidated financial statements
and the related notes and Managements Discussion and
Analysis of Financial Condition and Results of Operations
appearing elsewhere in this
Form 10-K.
The consolidated statement of operations data for each of the
years ended February 1, 2009, February 3, 2008, and
January 31, 2007 and the consolidated balance sheet data as
of February 1, 2009 and February 3, 2008 are derived
from, and qualified by reference to, our audited consolidated
financial statements and related notes appearing elsewhere in
this annual report. The consolidated statement of operations
data for the fiscal years ended January 31, 2006 and
January 31, 2005 and the consolidated balance sheet data as
of January 31, 2007, January 31, 2006 and
January 31, 2005 are derived from our underlying accounting
records. The consolidated statements of income for the years
ended January 31, 2006 and January 31, 2005 and
balance sheets for the fiscal years ended January 31, 2007,
January 31, 2006 and January 31, 2005 have been
prepared on the same basis as our audited consolidated financial
statements and, in the opinion of management, contain all
adjustments necessary to fairly present the information set
forth below.
We completed a corporate reorganization on July 26, 2007.
The financial data below reflects our operations as if the
reorganization had occurred prior to the first period presented.
Refer to note 10 of the financial statements appearing
elsewhere in this
Form 10-K
for further details related to the reorganization.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 1,
|
|
|
February 3,
|
|
|
January 31,
|
|
|
January 31,
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Consolidated statement of operations data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
353,488
|
|
|
$
|
269,942
|
|
|
$
|
147,964
|
|
|
$
|
84,129
|
|
|
$
|
40,748
|
|
Cost of goods sold(1)
|
|
|
174,421
|
|
|
|
125,015
|
|
|
|
72,249
|
|
|
|
41,177
|
|
|
|
19,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
179,067
|
|
|
|
144,927
|
|
|
|
75,715
|
|
|
|
42,952
|
|
|
|
21,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses(1)
|
|
|
118,098
|
|
|
|
93,376
|
|
|
|
51,863
|
|
|
|
26,416
|
|
|
|
10,840
|
|
Provision for impairment and lease exit costs
|
|
|
4,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement of lawsuit
|
|
|
|
|
|
|
|
|
|
|
7,228
|
|
|
|
|
|
|
|
|
|
Principal stockholder bonus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,809
|
|
|
|
12,134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
56,564
|
|
|
|
51,551
|
|
|
|
16,624
|
|
|
|
3,727
|
|
|
|
(1,674
|
)
|
Other income (expense), net
|
|
|
821
|
|
|
|
1,029
|
|
|
|
104
|
|
|
|
4
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before provision for income taxes
|
|
|
57,386
|
|
|
|
52,580
|
|
|
|
16,728
|
|
|
|
3,730
|
|
|
|
(1,709
|
)
|
Provision for (recovery of) income taxes
|
|
|
16,884
|
|
|
|
20,464
|
|
|
|
8,752
|
|
|
|
2,336
|
|
|
|
(298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations
|
|
|
40,502
|
|
|
|
32,116
|
|
|
|
7,976
|
|
|
|
1,394
|
|
|
|
(1,411
|
)
|
Net loss from discontinued operations
|
|
|
(1,138
|
)
|
|
|
(1,273
|
)
|
|
|
(310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
39,363
|
|
|
$
|
30,843
|
|
|
$
|
7,666
|
|
|
$
|
1,394
|
|
|
$
|
(1,411
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.59
|
|
|
$
|
0.48
|
|
|
$
|
0.12
|
|
|
$
|
0.04
|
|
|
$
|
(0.04
|
)
|
Discontinued operations
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net basic earnings (loss) per share
|
|
$
|
0.57
|
|
|
$
|
0.46
|
|
|
$
|
0.12
|
|
|
$
|
0.04
|
|
|
$
|
(0.04
|
)
|
Diluted earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.57
|
|
|
$
|
0.46
|
|
|
$
|
0.12
|
|
|
$
|
0.04
|
|
|
$
|
(0.04
|
)
|
Discontinued operations
|
|
|
(0.02
|
)
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share
|
|
$
|
0.55
|
|
|
$
|
0.45
|
|
|
$
|
0.12
|
|
|
$
|
0.04
|
|
|
$
|
(0.04
|
)
|
Basic weighted-average number of shares outstanding
|
|
|
68,710,746
|
|
|
|
66,430,022
|
|
|
|
65,156,625
|
|
|
|
38,724,287
|
|
|
|
33,845,394
|
|
Diluted weighted-average number of shares outstanding
|
|
|
70,942,424
|
|
|
|
69,297,878
|
|
|
|
65,303,839
|
|
|
|
38,724,287
|
|
|
|
33,845,394
|
|
26
|
|
|
(1) |
|
Includes stock-based compensation expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 1,
|
|
|
February 3,
|
|
|
January 31,
|
|
|
January 31,
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cost of goods sold
|
|
$
|
765
|
|
|
$
|
743
|
|
|
$
|
360
|
|
|
$
|
755
|
|
|
$
|
|
|
Selling, general and administrative expenses
|
|
|
5,767
|
|
|
|
5,204
|
|
|
|
2,282
|
|
|
|
1,945
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,532
|
|
|
$
|
5,947
|
|
|
$
|
2,642
|
|
|
$
|
2,700
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
February 1,
|
|
|
February 3,
|
|
|
January 31,
|
|
|
January 31,
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Consolidated balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
56,797
|
|
|
$
|
52,545
|
|
|
$
|
15,494
|
|
|
$
|
3,877
|
|
|
$
|
7
|
|
Total assets
|
|
|
211,636
|
|
|
|
155,092
|
|
|
|
71,325
|
|
|
|
41,914
|
|
|
|
11,448
|
|
Long term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
594
|
|
Total stockholders equity
|
|
|
154,843
|
|
|
|
112,034
|
|
|
|
37,379
|
|
|
|
28,052
|
|
|
|
810
|
|
27
|
|
ITEM 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
You should read the following discussion and analysis of our
financial condition and results of operations in conjunction
with the Selected Consolidated Financial Data
section and our consolidated financial statements and related
notes appearing elsewhere in this Annual Report on
Form 10-K.
In addition, this discussion and analysis contains
forward-looking statements based on current expectations that
involve risks, uncertainties and assumptions, such as our plans,
objectives, expectations and intentions set forth in the
Special Note Regarding Forward-Looking Statements.
Our actual results and the timing of events may differ
materially from those anticipated in these forward looking
statements as a result of various factors, including those set
forth in the Item 1A Risk Factors
section and elsewhere in this Annual Report on
Form 10-K.
Certain tables may not sum due to rounding.
For fiscal years through fiscal 2006, our fiscal year ended on
January 31st in the year following the year mentioned.
Commencing with fiscal 2007, our fiscal year will end on the
Sunday closest to January 31st of the following year, typically
resulting in a fifty-two week year, but occasionally giving rise
to an additional week, resulting in a fifty-three week year.
Fiscal 2008, 2007 and 2006 ended on February 1, 2009,
February 3, 2008 and January 31, 2007, respectively
Overview
The world economy slowed considerably during fiscal 2008 as
problems in global financial markets became more widespread and
consumers cut back on retail spending amid fears of a global
recession. Our sales growth slowed in the latter part of the
third quarter of 2008, driven in part by this reduced spending.
We believe that the challenging economic climate combined with
the effect of the depreciation in the relative value of the
Canadian dollar compared to the U.S. dollar will continue
to adversely affect our fiscal 2009 projections for sales and
margin rates. The current overall economic climate will result
in a continued slowing of sales growth and have a negative
impact on our gross margins in our 2009 fiscal year. Given the
current economic conditions, our comparable store sales results
and results of operations during the third and fourth quarters
of fiscal 2008 have been negatively affected, and we believe
that fiscal 2009 will also be negatively affected by continued
reduced consumer spending and the short-term volatility of
foreign exchange rates, particularly in Canada.
lululemon is highly sensitive to increases and decreases in
consumer spending. Increased consumer spending in our
corporate-owned store locations create sales leverage, meaning
that fixed expenses, such as occupancy costs, are spread across
a greater revenue base, thereby improving operating margins. But
the reverse is also true: sales deleveraging creates downward
pressure on margins. The absence of growth in comparable store
sales and soft results in new markets impacted nearly all
consolidated operating expense line items when viewed as a
percentage of total net sales.
In response to the changes in the world economy and the impact
on our operating results, we have taken steps to address the
deterioration in the retail environment and address our support
structure. These included the development and implementation of
several important strategic initiatives as part of our strategy
designed to increase customer traffic in our corporate-owned
store locations, reduce infrastructure expenses and improve our
operating results. These actions have been designed to structure
our business for long-term profitable growth and protect our
brand integrity.
The more significant actions taken by lululemon in fiscal 2008
to invigorate our business included:
|
|
|
|
|
A plan for management to continue ongoing evaluations of our
portfolio of corporate-owned store locations and to refine our
real estate selection process. In fiscal 2008 we closed one
corporate-owned store in Texas which was underperforming. As we
continue our evaluation we may in future periods close
additional corporate-owned store locations, dispose of property
and equipment and exit in-place operating leases;
|
|
|
|
A reduction in employee head count both in our corporate-owned
store locations and at head office, including changes in the
structure between corporate-owned store locations and head
office;
|
|
|
|
The introduction of temporary locations during the peak holiday
selling season which enabled us to reach incremental customers
and generate incremental full price sales as well as building
additional awareness and demand for our brand in new
markets; and
|
|
|
|
A reduction in discretionary spending and improved efficiencies
brought about by our IT implementation.
|
28
Prior to changes in the world economy, we reevaluated our
operating performance in Japan and our strategic priorities.
This timely analysis led to our decision to discontinue our
operations in Japan in fiscal 2008. In the second quarter of
fiscal 2008 we closed three of our stores in Japan and closed
our fourth and final store in Japan during the third quarter of
fiscal 2008 and classified our Japanese operations as
discontinued operations in the second quarter of fiscal 2008.
Japan represented less than 1.5% of our revenues in fiscal 2007
and required a disproportionate amount of management time and
attention during fiscal 2007. We agreed with Descente to end all
operations as a joint venture in the third quarter of fiscal
2008. We believe that our time, attention and capital resources
are best spent focused on our top priorities, which are growth
in the United States, where we plan to open six stores during
fiscal 2009, and the development of an
e-commerce
business.
Management expects lululemon to continue to face a very
difficult economic environment throughout fiscal 2009, in both
North America and internationally. We expect to report negative
comparable store sales for fiscal 2009. Additionally, our
earnings for fiscal 2009 may be impacted by additional
provisions for asset impairment and lease exit costs if
management identifies additional underperforming corporate-owned
store locations to close. lululemon plans to be disciplined in
its approach to new store openings, in both existing and new
markets, and adjust as needed in response to further worsening
in the world economy.
Operating
Segment Overview
lululemon is a designer and retailer of technical athletic
apparel operating primarily in North America. Our yoga-inspired
apparel is marketed under the lululemon athletica brand name. We
offer a comprehensive line of apparel and accessories including
fitness pants, shorts, tops and jackets designed for athletic
pursuits such as yoga, dance, running and general fitness. As of
February 1, 2009, our branded apparel was principally sold
through 113 corporate-owned and franchise stores that are
primarily located in Canada and the United States. We believe
our vertical retail strategy allows us to interact more directly
with and gain insights from our customers while providing us
with greater control of our brand. In fiscal 2008, 68.9% of our
net revenue was derived from sales of our products in Canada,
31.1% of our net revenue was derived from the sales of our
products in the United States and an immaterial amount of our
net revenue was derived from sales of our products outside of
North America. In fiscal 2007, 80.3% of our net revenue was
derived from sales of our products in Canada, 19.7% of our net
revenue was derived from the sales of our products in the United
States and an immaterial amount of our net revenue was derived
from sales of our products outside of North America. In fiscal
2006, 87.1% of our net revenue was derived from sales of our
products in Canada, 11.7% of our net revenue was derived from
the sales of our products in the United States and 1.2% of our
net revenue was derived from sales of our products outside of
North America.
Our net revenue has grown from $40.7 million in fiscal 2004
to $353.5 million in fiscal 2008. This represents a
compound net annual growth rate of 71.6%. Our net revenue from
continuing operations also increased from $269.9 million in
fiscal 2007 to $353.5 million in fiscal 2008, representing
an 30.9% increase. Our increase in net revenue from fiscal 2004
to fiscal 2008 resulted from the addition of 35 retail locations
in fiscal 2008, 31 retail locations in fiscal 2007, 14 retail
locations in fiscal 2006 and 17 retail locations in fiscal 2005,
and comparable store sales growth of 0%, 34%, 25% and 19% in
fiscal 2008, fiscal 2007, fiscal 2006 and fiscal 2005,
respectively. Our ability to open new stores and grow sales in
existing stores has been driven by increasing demand for our
technical athletic apparel and a growing recognition of the
lululemon athletica brand. We believe our superior products,
strategic store locations, inviting store environment,
grassroots marketing approach and distinctive corporate culture
are responsible for our strong financial performance. We have
recently increased our focus on our mens apparel line, net
revenue from which increased 39% in fiscal 2008 compared to
fiscal 2007 and represented approximately 12% of net revenue in
fiscal 2008 versus 10% of net revenue in fiscal 2007, and our
accessories business, which represented approximately 9% and 10%
of net revenue for each of fiscal 2008 and fiscal 2007,
respectively.
We have three reportable segments: corporate-owned stores,
franchises and other. We report our segments based on the
financial information we use in managing our businesses. While
we receive financial information for each corporate-owned store,
we have aggregated all of the corporate-owned stores into one
reportable segment due to the similarities in the economic and
other characteristics of these stores. Our franchises segment
accounted for 4.6% of our net revenues from continuing
operations in fiscal 2008, 6.7% in fiscal 2007 and 14.3% in
fiscal 2006. Opening new franchise stores is not a significant
part of our near-term growth strategy, and we therefore expect
that if the revenue derived from our franchise stores continues
to comprise less than 10% of the net revenue we report in
29
future fiscal years, we will re-evaluate our segment reporting
disclosures. Our other operations accounted for less than 10% of
our net revenues from continuing operations in each of fiscal
2008, fiscal 2007 and fiscal 2006.
As of February 1, 2009, we sold our products through 103
corporate-owned stores located in Canada and the United States.
As previously disclosed, we discontinued our operations in Japan
in the third quarter of fiscal 2008. We plan to increase our net
revenue in North America by opening additional corporate-owned
stores in new and existing markets. Corporate-owned stores net
revenue accounted for 89.3% of total net revenue in fiscal 2008
and 89.1% of total net revenue in fiscal 2007.
As of February 1, 2009, we also had five franchise stores
located in North America and five franchise stores located in
Australia. In the past, we have entered into franchise
agreements to distribute lululemon athletica branded products to
more quickly disseminate our brand name and increase our net
revenue and net income. In exchange for the use of our brand
name and the ability to operate lululemon athletica stores in
certain regions, our franchisees generally pay us a one-time
franchise fee and ongoing royalties based on their gross
revenue. Additionally, unless otherwise approved by us, our
franchisees are required to sell only lululemon athletica
branded products, which are purchased from us at a discount to
the suggested retail price. Pursuing new franchise partnerships
or opening new franchise stores is not a significant part of our
near-term store growth strategy. In some cases, we may exercise
our contractual rights to purchase franchises where it is
attractive to us.
We believe that our athletic apparel has and will continue to
appeal to consumers outside of North America who value its
technical attributes as well as its function and style. In 2004,
we opened our first franchise store in Australia. During fiscal
2008 we invested in LULULEMON ATHLETICA (AUSTRALIA) PTY LTD.
which operates five franchise stores. In 2005, we opened a
franchise store in Japan. In 2006, we terminated our franchise
arrangement and entered into a joint venture agreement with
Japanese apparel company Descente Ltd, or Descente, a global
leader in fabric technology, to operate our stores in Japan,
which were discontinued in fiscal 2008.
In addition to deriving revenue from sales through our
corporate-owned stores and our franchises, we also derive other
net revenue, which includes the sale of our products directly to
wholesale customers, telephone sales to retail customers,
including related shipping and handling charges, warehouse sales
and sales through a limited number of company-operated
showrooms. Wholesale customers include select premium yoga
studios, health clubs and fitness centers. Telephone sales are
taken directly from retail customers through our call center.
Warehouse sales are typically held one or more times a year to
sell slow moving inventory or inventory from prior seasons to
retail customers at discounted prices. Our showrooms are
typically small locations that we open from time to time when we
enter new markets and feature a limited selection of our product
offering during select hours. Other net revenue accounted for
6.1% of total net revenue in fiscal 2008 and 4.2% of total net
revenue in fiscal 2007.
Basis of
Presentation
Net revenue is comprised of:
|
|
|
|
|
corporate-owned store net revenue, which includes sales to
customers through corporate-owned stores;
|
|
|
|
franchises net revenue, which consists of licensing fees and
royalties as well as sales of our products to
franchises; and
|
|
|
|
other net revenue, which includes sales to wholesale accounts,
telephone sales, warehouse sales and sales from company-operated
showrooms.
|
in each case, less returns and discounts.
In addition, we separately track comparable store sales, which
reflect net revenue at corporate-owned stores that have been
open for at least 12 months. Therefore, net revenue from a
store is included in comparable store sales beginning with the
first month for which the store has a full month of comparable
prior year sales. Comparable store sales include stores that
have been remodeled or relocated. Non-comparable store sales
include sales from new stores that have not been open for
12 months, sales from showrooms, and sales from stores that
were closed within the past 12 months.
30
By measuring the change in
year-over-year
net revenue in stores that have been open for 12 months or
more, comparable store sales allows us to evaluate how our core
store base is performing. Various factors affect comparable
store sales, including:
|
|
|
|
|
the location of new stores relative to existing stores;
|
|
|
|
consumer preferences, buying trends and overall economic trends;
|
|
|
|
our ability to anticipate and respond effectively to customer
preferences for technical athletic apparel;
|
|
|
|
competition;
|
|
|
|
changes in our merchandise mix;
|
|
|
|
pricing;
|
|
|
|
the timing of our releases of new merchandise and promotional
events;
|
|
|
|
the effectiveness of our grassroots marketing efforts;
|
|
|
|
the level of customer service that we provide in our stores;
|
|
|
|
our ability to source and distribute products
efficiently; and
|
|
|
|
the number of stores we open, close (including for temporary
renovations) and expand in any period.
|
As we continue our store expansion program, we expect that a
greater percentage of our net revenue will come from
non-comparable store sales. Opening new stores is an important
part of our growth strategy. Accordingly, comparable store sales
has limited utility for assessing the success of our growth
strategy insofar as comparable store sales do not reflect the
performance of stores open less than 12 months.
Cost of goods sold includes:
|
|
|
|
|
the cost of purchased merchandise, inbound freight, duty and
non-refundable taxes incurred in delivering goods to our
distribution centers;
|
|
|
|
the cost of our production, merchandise and design departments
including salaries, stock-based compensation and benefits, and
operating expenses;
|
|
|
|
the cost of occupancy related to store operations (such as rent
and utilities) and the depreciation and amortization related to
store-level capital expenditures;
|
|
|
|
the cost of our distribution centers (such as rent and
utilities) as well as other fees we pay to third parties to
operate our distribution centers and the depreciation and
amortization related to our distribution centers;
|
|
|
|
hemming; and
|
|
|
|
shrink and valuation reserves.
|
Cost of goods sold also may change as we open or close stores
because of the resulting change in related occupancy costs. The
primary drivers of the costs of individual goods are the costs
of raw materials and labor in the countries where we source our
merchandise. In fiscal 2008, fiscal 2007 and fiscal 2006, cost
of goods sold included $0.8 million, $0.7 million and
$0.4 million, respectively, of charges related to
stock-based compensation.
Our selling, general and administrative expenses consist
of all operating costs not otherwise included in cost of goods
sold, provision for impairment and lease exit costs and
settlement of lawsuit. Our selling, general and administrative
expenses include marketing costs, accounting costs, information
technology costs, professional fees, corporate facility costs,
corporate and store-level payroll and benefits expenses
including stock-based compensation (other than the salaries and
benefits and stock-based compensation for our production,
merchandise and design departments included in cost of goods
sold and other corporate costs). In fiscal 2008, fiscal 2007 and
fiscal 2006, selling, general and administrative expenses
included $5.8 million, $5.2 million and
$2.3 million, respectively, of charges related to
stock-based compensation. Our selling, general and
administrative expenses also include depreciation and
amortization expense for all assets other than depreciation and
amortization expenses related to store-level capital
expenditures and our distribution centers, each of which are
included in cost of goods sold. We anticipate that our selling,
general and administrative expenses will increase in absolute
dollars due to anticipated continued growth of our corporate
support staff and store-level employees.
31
Provision for impairment and lease exit costs consists of
asset impairments, lease exit and other related costs associated
with the closure of one US corporate-owned store in the fourth
quarter of fiscal 2008 as well as an asset impairment provision
based on managements ongoing evaluation of its portfolio
of corporate-owned store locations. Long-lived assets are
reviewed at the store level periodically for impairment or
whenever events or changes in circumstances indicate that full
recoverability of net assets through future cash flows is in
question. Factors used in the evaluation include, but are not
limited to, managements plans for future operations,
recent operating results and projected cash flows.
Settlement of lawsuit consists of a payment we made in
February 2007 in the amount of $7.2 million to a third
party website developer arising from the termination of a profit
sharing arrangement associated with our retail website for our
products. We accrued for the entire settlement amount in fiscal
2006.
Stock-based compensation expense includes charges
incurred in recognition of compensation expense associated with
grants of stock options, grants of restricted stock units, and
stock purchases. In December 2005, we adopted the fair
value recognition and measurement provisions of
SFAS No. 123(R), Share-Based Payment
(SFAS 123(R)). SFAS 123(R) is applicable to
stock-based awards exchanged for employee services and in
certain circumstances for non-employee directors. We recognize
stock-based compensation expense for both awards granted by us
and awards granted under a stockholder sponsored plan. Pursuant
to SFAS 123(R), stock-based compensation expense is
measured at the grant date, based on the fair value of the award
and is recognized as an expense over the requisite service
period.
Prior to our initial public offering in July 2007, the fair
value of the shares of common stock that underlie the stock
options we granted was determined by our board of directors. Our
board of directors determined a valuation of lululemon as of
April 30, 2006. The valuation was calculated based upon the
equity value implied by the December 2005 transaction in
which Mr. Wilson sold 48% of his interest in lululemon to a
group of private equity investors for approximately
$193.3 million. At the time, our board of directors
believed the December 2005 transaction was a valid indication of
fair value because the terms of the December 2005 transaction
were the result of arms-length negotiations among independent
parties. Because there had been no public market for our common
stock, our board used this valuation to determine the fair value
of our common stock at the time of grant of the options.
In connection with the preparation of the financial statements
necessary for our initial public offering and based in part on
discussions with prospective underwriters for the planned
offering, in March 2007 we reassessed the estimated accounting
fair value as of January 2007 of common stock in light of the
potential completion of the initial public offering. After
reviewing its valuation, our board of directors determined that
the valuation would not be appropriate for valuing the options
as the valuation did not fully consider requirements under
SFAS 123(R) and other relevant regulatory guidelines,
specifically:
|
|
|
|
|
the valuation did not coincide with the option grant
dates; and
|
|
|
|
the valuation incorrectly included a minority interest discount.
|
As a result, management determined that it would be necessary to
retrospectively calculate a new valuation for the July 2006
option grants. Based upon the reassessment, we determined that
the accounting fair value of the options granted to employees
from February 1, 2006 to January 31, 2007 was greater
than the exercise price for certain of those options. The
comparison of the originally determined fair value and
reassessed fair value is as follows for all dates on which an
option was granted, assuming that our corporate reorganization
had occurred and using the initial public offering price of
$18.00 per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
|
|
|
Original
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
Public
|
|
|
Fair Value
|
|
|
Reassessed
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Offering
|
|
|
Assessment
|
|
|
Fair Value
|
|
Grant Date
|
|
Granted
|
|
|
Price
|
|
|
Price
|
|
|
of Options
|
|
|
of Options
|
|
|
July 3, 2006
|
|
|
2,899,186
|
|
|
$
|
0.58
|
|
|
$
|
18.00
|
|
|
$
|
0.33
|
|
|
$
|
0.91
|
|
December 6, 2006
|
|
|
5,955
|
|
|
$
|
0.58
|
|
|
$
|
18.00
|
|
|
$
|
0.33
|
|
|
$
|
8.09
|
|
December 27, 2006
|
|
|
1,309,008
|
|
|
$
|
0.58
|
|
|
$
|
18.00
|
|
|
$
|
0.33
|
|
|
$
|
8.09
|
|
January 3, 2007
|
|
|
357,335
|
|
|
$
|
0.58
|
|
|
$
|
18.00
|
|
|
$
|
0.33
|
|
|
$
|
8.09
|
|
Based upon the reassessment discussed above, we determined the
reassessed accounting fair value of the options to purchase
4,571,484 shares of common stock granted to employees
during the period from February 1,
32
2006 to January 31, 2007 ranged from $0.91 to $8.09 per
share. As a result of the reassessed fair value of our grants of
stock options, the aggregate fair value of our stock options
increased by $14.6 million.
Stock-based compensation expense for the year ended
January 31, 2007 includes the difference between the
reassessed accounting fair value per share of the common stock
on the date of grant and the exercise price per share and is
amortized over the vesting period of the underlying options
using the straight-line method. There are significant judgments
and estimates inherent in the determination of the reassessed
accounting fair values. For this and other reasons, the
reassessed accounting fair value used to compute the stock-based
compensation expense may not be reflective of the fair market
value that would result from the application of other valuation
methods, including accepted valuation methods for tax purposes.
We record our stock-based compensation expense in cost of goods
sold and selling, general and administrative expenses as
stock-based awards have been made to employees whose salaries
are classified in both expense categories.
Interest income includes interest earned on our cash
balances and our advances to franchise. We expect to continue to
generate interest income to the extent that our cash generated
from operations exceeds our cash used for investment.
Interest expense includes interest costs associated with
our credit facilities and with letters of credit drawn under
these facilities for the purchase of merchandise. We have
maintained relatively small outstanding balances on our credit
facilities and expect to continue to do so.
Provision for income taxes depends on the statutory tax
rates in the countries where we sell our products. Historically
we have generated taxable income in Canada and we have generated
tax losses in the United States. For periods up to and including
the second quarter of fiscal 2007, we recorded a full valuation
allowance against our losses in the United States. In the third
and fourth quarters of fiscal 2007, we earned taxable income in
the United States. During the second quarter of fiscal 2008,
after considering a number of factors, including recent taxable
income, utilization of previously unrealized NOLs, our
growth strategy as well as other business and macroeconomic
factors, we determined that we would more likely than not
realize the benefit of deferred tax assets through future
taxable income. As a result of this analysis, we have recorded
deferred tax assets in respect of the United States NOLs,
foreign tax credits and other deductible temporary differences
of $17.9 million, of which $5.9 million has been recorded though
income tax expense and $12.0 million through additional paid-in
capital.
Several factors have contributed to our effective tax rate in
recent periods being significantly higher than our anticipated
long-term effective tax rate. First, in fiscal 2008, fiscal
2007, fiscal 2006 and fiscal 2005, we generated losses in the
United States which we were unable to offset against our income
in Canada. Second, in fiscal 2008, fiscal 2007, fiscal 2006 and
fiscal 2005 we incurred stock-based compensation expense of
$6.5 million, $5.9 million, $2.6 million and
$2.7 million, respectively, a portion of which were not
deductible for tax purposes in Canada and the United States
during these periods. The impact of these losses and
non-deductible expenses on our effective tax rate was
exacerbated in fiscal 2005 by the payment of a bonus to our
principal stockholder in that period. Prior to December 2005 our
sole stockholder, Mr. Wilson, received a bonus payout each
year representing a substantial percentage of our earnings
before income taxes. Following Mr. Wilsons sale of
48% of his interest in lululemon to a group of private equity
investors in December 2005 we discontinued this practice.
Payments of these bonuses therefore were eliminated in fiscal
2006 from $12.8 million in fiscal 2005. This payment in
fiscal 2005 significantly decreased our income before income
taxes in this period and accordingly resulted in us realizing a
higher effective tax rate in this period as we gave effect to
the non-deductible nature of the losses and the stock-based
compensation expenses. Our effective tax rate in fiscal 2008 was
29.4%, compared to 38.9% in fiscal 2007, and 52.3% in fiscal
2006.
We anticipate that in the future we may start to sell our
products directly to some customers located outside of Canada,
the United States and Australia, in which case we would become
subject to taxation based on the foreign statutory rates in the
countries where these sales take place and our effective tax
rate could fluctuate accordingly.
33
Results
of Operations
The following tables summarize key components of our results of
operations for the periods indicated, both in dollars and as a
percentage of net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 1,
|
|
|
February 3,
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Consolidated statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
353,488
|
|
|
$
|
269,942
|
|
|
$
|
147,964
|
|
Cost of goods sold
|
|
|
174,421
|
|
|
|
125,015
|
|
|
|
72,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
179,067
|
|
|
|
144,927
|
|
|
|
75,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
118,098
|
|
|
|
93,376
|
|
|
|
51,863
|
|
Provision for impairment and lease exit costs
|
|
|
4,405
|
|
|
|
|
|
|
|
|
|
Settlement of lawsuit
|
|
|
|
|
|
|
|
|
|
|
7,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
56,564
|
|
|
|
51,551
|
|
|
|
16,624
|
|
Other income (expense), net
|
|
|
821
|
|
|
|
1,029
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
57,385
|
|
|
|
52,580
|
|
|
|
16,728
|
|
Provision for income taxes
|
|
|
16,884
|
|
|
|
20,464
|
|
|
|
8,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
40,501
|
|
|
|
32,116
|
|
|
|
7,976
|
|
Net loss from discontinued operations
|
|
|
(1,138
|
)
|
|
|
(1,273
|
)
|
|
|
(310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
39,363
|
|
|
$
|
30,843
|
|
|
$
|
7,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 1,
|
|
|
February 3,
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(% of net revenue)
|
|
|
Net revenue
|
|
|
100.0
|
|
|
|
100.0
|
|
|
|
100.0
|
|
Cost of goods sold
|
|
|
49.3
|
|
|
|
46.3
|
|
|
|
48.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
50.7
|
|
|
|
53.7
|
|
|
|
51.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
33.4
|
|
|
|
34.6
|
|
|
|
35.1
|
|
Provision for impairment and lease exit costs
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
Settlement of lawsuit
|
|
|
|
|
|
|
|
|
|
|
4.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
16.0
|
|
|
|
19.1
|
|
|
|
11.2
|
|
Other income (expense), net
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
16.2
|
|
|
|
19.5
|
|
|
|
11.3
|
|
Provision for income taxes
|
|
|
4.8
|
|
|
|
7.6
|
|
|
|
5.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
11.5
|
|
|
|
11.9
|
|
|
|
5.4
|
|
Net loss from discontinued operations
|
|
|
(0.3
|
)
|
|
|
(0.5
|
)
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
11.1
|
|
|
|
11.4
|
|
|
|
5.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Fiscal 2008 to Fiscal 2007
Net
Revenue
Net revenue increased $83.5 million, or 31%, to
$353.5 million in fiscal 2008 from $269.9 million in
fiscal 2007. This increase was primarily the result of sales
from new stores opened. Assuming the average exchange rate
between the Canadian and United States dollars in fiscal 2007
remained constant, our net revenue would have increased
$92.6 million, or 34%, in fiscal 2008. The constant dollar
increase in comparable store sales was driven
34
primarily by the strength of our existing product lines,
successful introduction of new products and increasing
recognition of the lululemon athletica brand name.
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 1,
|
|
|
February 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Net revenue by segment:
|
|
|
|
|
|
|
|
|
Corporate-owned stores
|
|
$
|
315,548
|
|
|
$
|
240,441
|
|
Franchises
|
|
|
16,198
|
|
|
|
18,141
|
|
Other
|
|
|
21,742
|
|
|
|
11,360
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
353,488
|
|
|
$
|
269,942
|
|
|
|
|
|
|
|
|
|
|
Corporate-Owned Stores. Net revenue from our
corporate-owned stores segment increased $75.1 million, or
31%, to $315.5 million in fiscal 2008 from
$240.4 million in fiscal 2007. The following contributed to
the $75.1 million increase in net revenue from our
corporate-owned stores segment:
|
|
|
|
|
New stores opened during fiscal 2008 contributed
$37.3 million, or 16%, of the increase. During fiscal 2008,
we opened 34 corporate-owned stores, consisting of three in
Canada and 31 in the United States;
|
|
|
|
New stores opened during fiscal 2007 prior to sales from such
stores becoming part of our comparable store sales base
contributed $34.3 million, or 14%, of the increase. This
consisted of five stores in Canada and 21 stores in the United
States; and
|
|
|
|
The acquisition of two Victoria, British Columbia and one
Bellevue, Washington franchise stores in September 2008
contributed $3.7 million, or 2%, of the increase.
|
The increase was partially offset by comparable store sales
decline in fiscal 2008, resulting in a $0.2 million
decrease to net revenue. Assuming the average exchange rate
between the Canadian and U.S. dollar in fiscal 2007
remained constant, our comparable store sales would have
increased 3% in fiscal 2008 and contributed $7.5 million,
or 3%, of the increase.
Franchises. Net revenue from our franchises
segment decreased $1.9 million, or 11%, to
$16.2 million in fiscal 2008 from $18.1 million in
fiscal 2007. The decrease in net revenue from our franchises
segment consisted primarily of franchises net revenue of
$2.7 million that shifted to corporate-owned stores net
revenue when we acquired two franchise stores in Victoria,
British Columbia and one franchise store in Bellevue,
Washington. This was partially offset by increased franchise
revenue of $0.8 million from our one remaining Canadian
franchise location and four franchise locations in the United
States.
Other. Net revenue from our other segment
increased $10.4 million, or 91%, to $21.7 million in
fiscal 2008 from $11.4 million in fiscal 2007. The
following contributed to the $10.4 million increase in net
revenue from our other segment:
|
|
|
|
|
temporary store locations opened in fiscal 2008 contributed
sales revenue of $3.2 million;
|
|
|
|
an additional warehouse sale in fiscal 2008 contributed
increased sales revenue of $2.8 million;
|
|
|
|
two new outlet locations opened in fiscal 2008 contributed sales
revenue of $2.0 million;
|
|
|
|
new and existing wholesale accounts contributed
$1.2 million of the increase;
|
|
|
|
showroom sales revenue increased $0.9 million; and
|
|
|
|
phonesale revenue accounted for $0.4 million of the
increase.
|
35
Gross
Profit
Gross profit increased $34.1 million, or 24%, to
$179.1 million in fiscal 2008 from $144.9 million in
fiscal 2007. The increase in gross profit was driven principally
by:
|
|
|
|
|
an increase of $75.1 million in net revenue from our
corporate-owned stores segment; and
|
|
|
|
an increase of $10.4 million in net revenue from our other
segment.
|
This amount was partially offset by:
|
|
|
|
|
an increase in product costs of $28.8 million associated
with our sale of goods through corporate-owned stores,
franchises and other segments;
|
|
|
|
an increase in occupancy costs of $12.8 million related to
an increase in corporate-owned stores;
|
|
|
|
an increase in depreciation of $4.4 million primarily
related to an increase in corporate-owned stores;
|
|
|
|
an increase of $2.1 million in expenses related to our
production, design and merchandising departments;
|
|
|
|
a decrease of $1.9 million in net revenue from our
franchise segment; and
|
|
|
|
an increase of $1.4 million in expenses related to
distribution costs as a result of increased production to
support our growth.
|
Gross profit, as a percentage of net revenue, or gross margin,
decreased 3.0%, to 50.7% in fiscal 2008 from 53.7% in fiscal
2007. The decrease in gross margin resulted from:
|
|
|
|
|
an increase in occupancy costs as a percentage of net revenue
that contributed to a decrease in gross margin of 2.0% as a
result of decreased sales per store and a resulting deleverage
on fixed occupancy costs;
|
|
|
|
an increase in store depreciation expense as a percentage of net
revenue in fiscal 2008 compared to fiscal 2007 as a result of
new store openings in new markets, which contributed to a
decrease in gross margin of 0.7%;
|
|
|
|
an increase in product costs as a percentage of net revenue that
contributed to a decrease in gross margin of 0.3%, primarily due
to an increase in corporate-owned store product costs and
increased mark-downs in consideration of the current economic
climate; and
|
|
|
|
an increase in expenses related to our production, design and
merchandising departments as a percentage of net revenue in
fiscal 2008 compared to fiscal 2007, which contributed to a
decrease in gross margin of 0.1%.
|
Our costs of goods sold in fiscal 2008 and fiscal 2007 included
$0.8 million and $0.7 million, respectively, of
stock-based compensation expense.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses increased
$24.7 million, or 26%, to $118.1 million in fiscal
2008 from $93.4 million in fiscal 2007. As a percentage of
net revenue, selling, general and administrative expenses
decreased 1.2%, to 33.4%, in 2008 from 34.6% in 2007. Of the
$24.7 million increase in selling, general and
administrative expenses:
|
|
|
|
|
$8.7 million resulted from an increase in store employee
compensation related to opening additional corporate-owned
stores;
|
|
|
|
$7.0 million resulted from an increase in other store
operating expenses primarily related to an increase of
$2.6 million in employee costs such as commissions,
bonuses, benefits and other employee costs, $1.6 million in
credit card fees, $1.0 million in communications, phone and
fax expense, $0.8 million in occupancy cost,
$0.6 million in repairs and maintenance expense, and
$0.3 million in travel expense;
|
|
|
|
$4.9 million resulted from an increase in corporate
compensation principally due to hiring of additional employees
to support our growth;
|
36
|
|
|
|
|
$3.2 million resulted from an increase in depreciation
related to property and equipment at the store support centre,
including depreciation our recently implemented software systems;
|
|
|
|
$2.3 million resulted from an increase in professional fees
as a result of increased regulatory requirements associated with
being a public company such as advisory fees for internal
control compliance and legal fees; and
|
|
|
|
$0.6 million resulted from an increase in stock-based
compensation expense.
|
This amount was partially offset by a decrease in distribution
costs of $1.6 million and a decrease in foreign exchange
losses of $0.4 million.
Our selling, general and administrative expenses in fiscal 2008
and fiscal 2007 included $5.8 million and
$5.2 million, respectively, of stock-based compensation
expense.
Income
from Operations
Income from operations increased $5.0 million, or 10%, to
$56.6 million in fiscal 2008 from $51.6 million in
fiscal 2007. The increase of $5.0 million in income from
operations for fiscal 2008 was primarily due to a
$34.1 million increase in gross profit resulting from sales
from additional corporate-owned stores opened during fiscal 2008
and fiscal 2007, offset by an increase of $24.7 million in
selling, general and administrative expenses and a
$4.4 million provision for impairment and lease exit costs.
On a segment basis, we determine income from operations without
taking into account our general corporate expenses such as
corporate employee costs, travel expenses and corporate rent.
For purposes of our managements analysis of our financial
results, we have allocated some general product expenses to our
corporate-owned stores segment. For example, all expenses
related to our production, design, merchandise and distribution
departments have been allocated to this segment.
Income from operations (before general corporate expenses) from:
|
|
|
|
|
our corporate-owned stores segment increased $15.0 million,
or 19%, to $94.9 million for fiscal 2008 from
$79.8 million for fiscal 2007 primarily due to an increase
in corporate-owned stores gross profit of $32.9 million,
offset by an increase of $12.8 million in store employee
expenses, $3.4 million in administrative expenses, and an
increase of $1.2 million in other store expenses;
|
|
|
|
our franchises segment decreased $1.2 million, or 14%, to
$7.5 million in fiscal 2008 from $8.8 million in
fiscal 2007 primarily as a result of franchise income from
operations of $1.8 million included in the comparative
period shifting to corporate-owned stores income from operations
when we acquired two franchise stores in Victoria, British
Columbia and one franchise store in Bellevue, Washington,
partially offset by increased franchise income from operations
of $0.6 million from our remaining franchise
locations; and
|
|
|
|
our other segment increased $6.3 million, or 113%, to
$11.9 million in fiscal 2008 from $5.6 million in
fiscal 2007 primarily due to an increase in revenue of
$10.4 million, offset by an increase of $4.1 million
in product costs.
|
Income from operations also includes general corporate expenses.
General corporate expenses increased $15.0 million, or 35%,
to $57.7 million in fiscal 2008 from $42.7 million in
fiscal 2007 primarily due to an increase in corporate employee
costs of $4.8 million, a provision for impairment and lease
exit costs of $4.4 million, an increase in depreciation and
amortization expense of $3.2 million, and an increase in
other corporate expenses of $2.6 million.
Our $4.4 million provision for impairment and lease exit
costs was a result of managements review of our portfolio
of corporate-owned store locations. In conjunction with our
ongoing evaluation to ensure that each of our corporate-owned
stores fit into our long-term growth strategy we closed one of
our corporate-owned stores in the fourth quarter of fiscal 2008.
We recorded a $0.7 million charge related to this closure,
which included a $0.5 million asset impairment and a
$0.2 million accrual for lease exit costs. The fair market
values were estimated using an expected present value technique.
We identified four other corporate-owned store locations where
the carrying amount of the assets exceeded managements
estimate of the fair value of the location. Asset
37
impairment of $2.5 million was recorded as at
February 1, 2009 related to these locations. Further, we
accrued $1.2 million for lease exit costs related to
certain locations which management has identified as
underperforming corporate-owned store locations.
Other
Income, Net
Other income, net decreased $0.2 million, or 20%, to
$0.8 million in fiscal 2008 from $1.0 million in
fiscal 2007. Of the $0.2 million decrease in other income,
net:
|
|
|
|
|
$0.2 million resulted from a decrease in interest
income; and
|
|
|
|
$0.1 million resulted from an increase in equity loss
associated with our investment in Australia.
|
This amount was partially offset by a $0.1 million decrease
in interest expense.
Provision
for Income Taxes
Provision for income taxes decreased $3.6 million, or 17%,
to $16.9 million in fiscal 2008 from $20.5 million in
fiscal 2007. In fiscal 2008, our effective tax rate was 29.4%
compared to 38.9% in fiscal 2007. The reduction in the effective
tax rate in fiscal 2008 resulted from the decrease in the
Canadian corporate tax rate from 35% to 32% as well as the
release of the valuation against U.S. loss carryforwards.
Net
Income
Net income increased $8.5 million, or 28%, to
$39.4 million in fiscal 2008 from $30.8 million in
fiscal 2007. The increase in net income of $8.5 million in
fiscal 2008 was a result of an increase in gross profit of
$34.1 million resulting from sales from additional
corporate-owned stores opened and an increase of
$3.5 million in provision for income taxes, offset by
increases in selling, general and administrative expenses of
$24.7 million and a $4.4 million provision for
impairment and lease exit costs.
Comparison
of Fiscal 2007 to Fiscal 2006
Net
Revenue
Net revenue increased $122.0 million, or 82%, to
$269.9 million in fiscal 2007 from $148.0 million in
fiscal 2006. This increase was primarily the result of increased
comparable store sales, sales from new stores opened, and the
strengthening of the average exchange rate for the Canadian
dollar against the U.S. dollar during the period. Assuming
the average exchange rate between the Canadian and United States
dollars in fiscal 2006 remained constant, our net revenue would
have increased $104.5 million, or 71%, in fiscal 2007.
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 3,
|
|
|
January 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net revenue by segment:
|
|
|
|
|
|
|
|
|
Corporate-owned stores
|
|
$
|
240,441
|
|
|
$
|
119,812
|
|
Franchises
|
|
|
18,141
|
|
|
|
21,360
|
|
Other
|
|
|
11,360
|
|
|
|
6,792
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
269,942
|
|
|
$
|
147,964
|
|
|
|
|
|
|
|
|
|
|
Corporate-Owned Stores. Net revenue from our
corporate-owned stores segment increased $120.6 million, or
101%, to $240.4 million in fiscal 2007 from
$119.8 million in fiscal 2006. The following contributed to
the $120.6 million increase in net revenue from our
corporate-owned stores segment:
|
|
|
|
|
Comparable store sales growth of 34% in fiscal 2007 contributed
$39.6 million, or 32%, of the increase. Assuming the
average exchange rate between the Canadian and U.S. dollar
in fiscal 2006 remained constant, our comparable store sales
would have increased 24% in fiscal 2007 and contributed
$28.6 million, or 23%, of the increase. The increase in
comparable store sales was driven primarily by the strength of
our existing
|
38
|
|
|
|
|
product lines, successful introduction of new products and
increasing recognition of the lululemon athletica brand name;
|
|
|
|
|
|
New stores opened during fiscal 2007 contributed
$29.8 million, or 24.3%, of the increase. During fiscal
2007, we opened 26 corporate-owned stores, consisting of five in
Canada and 21 in the United States;
|
|
|
|
New stores opened during fiscal 2006 prior to sales from such
stores becoming part of our comparable store sales base
contributed $28.1 million, or 22.9%, of the increase. This
consisted of five stores in Canada and five stores in the United
States;
|
|
|
|
The acquisition of three Calgary franchise stores in April 2007
contributed $22.8 million, or 18.6%, of the increase; and
|
|
|
|
The inclusion of three additional days in our fiscal year in
order to align our year-end to a 52/53 week fiscal year
contributed an additional $2.5 million.
|
Franchises. Net revenue from our franchises
segment decreased $3.3 million, or 15%, to
$18.1 million in fiscal 2007 from $21.4 million in
fiscal 2006. The decrease in net revenue from our franchises
segment consisted primarily of franchises net revenue of
$9.7 million that shifted to corporate-owned stores net
revenue when we acquired three franchise stores in Calgary. This
was partially offset by increased franchise revenue of
$6.5 million from our remaining franchise locations and one
new franchise location in the United States and one new location
in Australia.
Other. Net revenue from our other segment
increased $4.6 million, or 67%, to $11.4 million in
fiscal 2007 from $6.8 million in fiscal 2006. The following
contributed to the $4.6 million increase in net revenue
from our other segment:
|
|
|
|
|
new and existing wholesale accounts contributed
$1.7 million of the increase;
|
|
|
|
showroom sales revenue increased $1.7 million;
|
|
|
|
phone sale revenue accounted for $0.6 million of the
increase; and
|
|
|
|
warehouse sales revenue increased $0.6 million.
|
Gross
Profit
Gross profit increased $69.2 million, or 91%, to
$144.9 million in fiscal 2007 from $75.7 million in
fiscal 2006. The increase in gross profit was driven principally
by:
|
|
|
|
|
an increase of $120.6 million in net revenue from our
corporate-owned stores segment; and
|
|
|
|
an increase of $4.6 million in net revenue from our other
segment.
|
This amount was partially offset by:
|
|
|
|
|
an increase in product costs of $37.9 million associated
with our sale of goods through corporate-owned stores,
franchises and other segments;
|
|
|
|
an increase in occupancy costs of $7.6 million related to
an increase in corporate-owned stores;
|
|
|
|
a decrease in franchise revenue of $3.3 million primarily
related to our acquisition of three franchise locations in
Calgary;
|
|
|
|
an increase in depreciation of $3.1 million primarily
related to an increase in the number of corporate-owned stores;
|
|
|
|
an increase of $2.9 million in expenses related to our
production, design and merchandising departments;
|
|
|
|
an increase of $2.0 million in expenses related to
distribution costs as a result of increased production to
support our growth.
|
39
Gross profit as a percentage of net revenue, or gross margin,
increased 2.5%, to 53.7% in fiscal 2007 from 51.2% in fiscal
2006. The increase in gross margin resulted from:
|
|
|
|
|
a reduction in product costs as a percentage of net revenue that
contributed to an increase in gross margin of 1.8%, primarily
related to our acquisition of three franchise stores in Calgary;
|
|
|
|
a decrease in expenses related to our production, design and
distribution departments (including stock-based compensation
expense) as a percentage of net revenue in fiscal 2007 compared
to fiscal 2006, which contributed to an increase in gross margin
of 0.7%; and
|
|
|
|
a decrease in occupancy costs as a percentage of net revenue
that contributed to an increase in gross margin of 0.1%.
|
This amount was partially offset by an increase in store
depreciation expense as a percentage of net revenue in fiscal
2007 compared to fiscal 2006 as a result of new store openings
in new markets, which contributed to a decrease in gross margin
of 0.2%.
Our costs of goods sold in fiscal 2007 and fiscal 2006 included
$0.7 million and $0.4 million, respectively, of
stock-based compensation expense.
Selling,
General and Administrative Expenses
Selling, general and administrative expenses increased
$41.6 million, or 80%, to $93.4 million in fiscal 2007
from $51.9 million in fiscal 2006. As a percentage of net
revenue, selling, general and administrative expenses decreased
0.5%, to 34.6%, in 2007 from 35.1% in 2006. Of the
$41.6 million increase in selling, general and
administrative expenses:
|
|
|
|
|
$17.1 million resulted from an increase in store employee
compensation related to opening additional corporate-owned
stores;
|
|
|
|
$7.4 million resulted from an increase in corporate
compensation principally due to hiring of additional employees
to support our growth;
|
|
|
|
$13.5 million resulted from an increase in other operating
expenses primarily related to an increase of $4.0 million
in distribution costs, $1.7 million in credit card fees,
$1.5 million in supplies, $1.2 million in packaging
costs, $1.8 million in marketing costs, $1.0 million
in repairs and maintenance $1.0 million in miscellaneous
expense, $0.7 million in communications costs,
$0.3 million in insurance costs and $0.2 million in
meals and entertainment;
|
|
|
|
$2.9 million resulted from an increase in stock-based
compensation expense;
|
|
|
|
$1.4 million resulted from an increase in other operating
expenses such as travel expenses and rent associated with
corporate facilities; and
|
|
|
|
a foreign exchange loss of $0.7 million.
|
This amount was partially offset by a decrease in professional
fees of $1.4 million.
Our selling, general and administrative expenses in fiscal 2007
and fiscal 2006 included $5.2 million and
$2.5 million, respectively, of stock-based compensation
expense.
Income
from Operations
Income from operations increased $35.0 million, or 210%, to
$51.6 million in fiscal 2007 from $16.6 million in
fiscal 2006. The increase of $35.0 million in income from
operations for fiscal 2007 was primarily due to a
$69.2 million increase in gross profit resulting from
increased comparable store sales and additional sales from
corporate-owned stores opened during fiscal 2006 and fiscal
2007, the settlement of a lawsuit in fiscal 2006 of
$7.2 million, and partially offset by an increase of
$41.6 million in selling, general and administrative
expenses.
40
On a segment basis, we determine income from operations without
taking into account our general corporate expenses such as
corporate employee costs, travel expenses and corporate rent.
For purposes of our managements analysis of our financial
results, we have allocated some general product expenses to our
corporate-owned stores segment. For example, all expenses
related to our production, design, merchandise and distribution
departments have been allocated to this segment.
Income from operations (before general corporate expenses) from:
|
|
|
|
|
our corporate-owned stores segment increased $42.4 million,
or 113%, to $79.8 million for fiscal 2007 from
$37.4 million for fiscal 2006 primarily due to an increase
in corporate-owned stores gross profit of $68.5 million,
offset by an increase of $17.1 million in store employee
expenses and an increase of $9.0 million in other store
expenses;
|
|
|
|
our franchises segment decreased $1.9 million, or 18%, to
$8.8 million in fiscal 2007 from $10.7 million in
fiscal 2006 primarily as a result of franchises income from
operations of $4.5 million included in the comparative
period shifting to corporate-owned stores income from operations
when we acquired three franchise stores in Calgary, partially
offset by increased franchise income from operations of
$2.6 million from our remaining franchise
locations; and
|
|
|
|
our other segment increased $2.9 million, or 108%, to
$5.6 million in fiscal 2007 from $2.7 million in
fiscal 2006 primarily due to an increase in revenue of
$4.6 million, offset by an increase of $3.0 million in
product costs.
|
Income from operations also includes general corporate expenses.
General corporate expenses increased $10.3 million, or 32%,
to $42.7 million in fiscal 2007 from $32.4 million in
fiscal 2006 primarily due to an increase in corporate employee
costs of $6.0 million, an increase in depreciation and
amortization expense of $0.6 million, and an increase in
other corporate expenses of $1.4 million, partially offset
by a $1.4 million decrease in professional fees.
Other
Income, net
Interest income increased $1.0 million, to
$1.2 million in fiscal 2007 from $0.2 million in
fiscal 2006 due to higher average cash balances.
Interest expense increased $0.1 million, to
$0.2 million in fiscal 2007 from $0.1 million in
fiscal 2006 due to higher average borrowings on our line of
credit.
Provision
for Income Taxes
Provision for income taxes increased $11.7 million, to
$20.5 million in fiscal 2007 from $8.8 million in
fiscal 2006. In fiscal 2007, our effective tax rate was 38.9%
compared to 52.3% in fiscal 2006. In both fiscal 2006 and fiscal
2007, we generated losses in the United States which we were
unable to offset against our income in Canada for tax purposes.
In fiscal 2006 and fiscal 2007, we also incurred stock-based
compensation expenses of $2.6 million and
$5.9 million, respectively, a portion of which were not
deductible for tax purposes during these periods.
Net
Income
Net income increased $23.2 million, to $30.8 million
in fiscal 2007 from $7.7 million in fiscal 2006. The
increase in net income of $23.2 million in fiscal 2007 was
a result of an increase in gross profit of $69.2 million
resulting from increased comparable store sales, additional
sales from corporate-owned stores opened and the strengthening
of the average rate for the Canadian dollar against the
U.S. dollar during the period and the settlement of a
lawsuit in fiscal 2006 of $7.2 million, offset by increases
in selling, general and administrative expenses of
$41.5 million and an increase of $11.7 million in
provision for income taxes.
41
Seasonality
In fiscal 2008, fiscal 2007 and fiscal 2006, we recognized a
significant amount of our net revenue in the fourth quarter due
to significant increases in sales during the holiday season. We
recognized 29%, 39% and 35% of our full year gross profit in the
fourth quarter in fiscal 2008, fiscal 2007 and fiscal 2006,
respectively. Despite the fact that we have experienced a
significant amount of our net revenue and gross profit in the
fourth quarter of our fiscal year, we believe that the true
extent of the seasonality or cyclical nature of our business may
have been overshadowed by our rapid growth to date.
The level of our working capital reflects the seasonality of our
business. We expect inventory, accounts payable and accrued
expenses to be higher in the third and fourth quarters in
preparation for the holiday selling season. Because our products
are sold primarily through our stores, order backlog is not
material to our business.
Liquidity
and Capital Resources
Our cash requirements are principally for working capital and
capital expenditures, principally the build-out cost of new
stores, renovations of existing stores, and improvements to our
distribution facility and corporate infrastructure. Our need for
working capital is seasonal, with the greatest requirements from
August through the end of November each year as a result of our
inventory
build-up
during this period for our holiday selling season. Historically,
our main sources of liquidity have been cash flow from operating
activities, borrowings under our existing and previous revolving
credit facilities, and proceeds from equity offerings, including
our initial public offering.
As of February 1, 2009, our working capital (excluding cash
and cash equivalents) was $14.9 million and our cash and
cash equivalents was $56.8 million.
The following table summarizes our net cash flows provided by
and used in operating, investing and financing activities for
the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 1,
|
|
|
February 3,
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Total cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
46,443
|
|
|
$
|
36,481
|
|
|
$
|
25,449
|
|
Investing activities
|
|
|
(46,795
|
)
|
|
|
(35,235
|
)
|
|
|
(13,350
|
)
|
Financing activities
|
|
|
13,461
|
|
|
|
31,412
|
|
|
|
669
|
|
Effect of exchange rate changes
|
|
|
(8,857
|
)
|
|
|
4,393
|
|
|
|
(616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
$
|
4,252
|
|
|
$
|
37,051
|
|
|
$
|
12,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Activities
Operating Activities consist primarily of net income
adjusted for certain non-cash items, including depreciation and
amortization, deferred income taxes, realized gains and losses
on property and equipment, stock-based compensation expense and
the effect of the changes in non-cash working capital items,
principally accounts receivable, inventories, accounts payable
and accrued expenses.
In fiscal 2008, cash provided by operating activities increased
$10.0 million, to $46.4 million compared to cash
provided by operating activities of $36.5 million in fiscal
2007. The $10.0 million increase was primarily a result of
increased net income as we expanded our store base and a net
decrease in the change in other working capital balances,
partially offset by a decrease in items not affecting cash. The
net decrease in the change in other working capital balances was
primarily due to an increase in accrued liabilities resulting
from a provision for impairment and lease exit costs and was
partially offset by an increase in the change in inventories as
we build up spring and summer inventories for a larger store
base. The decrease in items not affecting cash was primarily due
to decreases in excess
42
tax benefits from stock-based compensation and deferred income
taxes, and was partially offset by an increase in depreciation
and amortization related to our increased store base.
Depreciation and amortization relate almost entirely to
leasehold improvements, furniture and fixtures, computer
hardware and software, equipment and vehicles in our stores and
other corporate buildings.
Depreciation and amortization increased $7.5 million to
$15.8 million in fiscal 2008 from $8.2 million in
fiscal 2007. Depreciation for our corporate-owned store segment
was $10.6 million, $6.1 million and $3.1 million
in fiscal 2008, fiscal 2007 and fiscal 2006, respectively.
Depreciation related to corporate activities was
$5.3 million, $2.1 million and $1.1 million in
fiscal 2008, fiscal 2007 and fiscal 2006, respectively. We have
not allocated any depreciation to our franchises or other
segments as these amounts to date have been immaterial.
Investing
Activities
Investing Activities relate entirely to capital
expenditures, investments in and advances to franchises, and
acquisitions of franchised stores.
Cash used in investing activities increased $11.6 million,
to $46.8 million in fiscal 2008 from $35.2 million in
fiscal 2007. This increase in cash used in investing activities
represents an increase in the number of new stores as well as
store improvements on a larger store base. Capital expenditures
for our corporate-owned stores segment were $30.1 million
in fiscal 2008 which included $27.0 million to open 34
corporate-owned stores (not including three acquired franchise
stores), and $20.7 million in fiscal 2007, which included
$17.0 million to open 28 stores (not including three
acquired franchise store). The remaining capital expenditures
for our corporate-owned stores segment in each period were for
ongoing store refurbishment. Capital expenditures related to
corporate activities and administration were $10.9 million
and $9.3 million in fiscal 2008 and fiscal 2007,
respectively. The capital expenditures in each period for
corporate activities and administration were for improvements at
our head office and other corporate buildings as well as
investments in information technology. There were no capital
expenditures associated with our franchises and other segments.
Investment in and advances to franchises are to LULULEMON
ATHLETICA (AUSTRALIA) PTY LTD. In fiscal 2008, fiscal 2007 and
fiscal 2006, we purchased our franchises in Victoria, British
Columbia and Bellevue, Washington for $3.4 million,
Calgary, Alberta for $5.6 million and Portland, Oregon for
$0.5 million, respectively.
Capital expenditures are expected to range between
$12.0 million to $13.0 million in fiscal 2009,
including approximately $3.2 million for approximately six
new stores, approximately $4.0 million for information
technology enhancements and the remainder for ongoing store
maintenance and for corporate activities. This does not include
capital expenditures for our internet retail website which we
expect to launch in early 2009.
Financing
Activities
Financing Activities consist primarily of costs related
to our initial public offering, cash received on the exercise of
stock options and excess tax benefits from stock-based
compensation. Cash provided by financing activities decreased
$18.0 million, to $13.5 million in fiscal 2008 from
$31.4 million in fiscal 2007. The decrease in cash provided
by financing activities was primarily due to a decrease of
$31.4 million in proceeds from our initial public offering,
net of offering costs offset by an increase of excess tax
benefits from stock-based compensation of $12.0 million and
proceeds from exercise of stock options $1.4 million.
We believe that our cash from operations, proceeds from our
initial public offering and borrowings available to us under our
revolving credit facility will be adequate to meet our liquidity
needs and capital expenditure requirements for at least the next
24 months. Our cash from operations may be negatively
impacted by a decrease in demand for our products as well as the
other factors described in Risk Factors. In
addition, we may make discretionary capital improvements with
respect to our stores, distribution facility, headquarters, or
other systems, which we would expect to fund through the
issuance of debt or equity securities or other external
financing sources to the extent we were unable to fund such
capital expenditures out of our cash from operations.
43
Revolving
Credit Facility
In April 2007, we entered into an uncommitted senior secured
demand revolving credit facility with Royal Bank of Canada.
The revolving credit facility provides us with available
borrowings in an amount up to CDN$20.0 million. The
revolving credit facility must be repaid in full on demand and
is available by way of prime loans in Canadian currency,
U.S. base rate loans in U.S. currency, bankers
acceptances, LIBOR based loans in U.S. currency or Euro
currency, letters of credit in Canadian currency or
U.S. currency and letters of guaranty in Canadian currency
or U.S. currency. The revolving credit facility bears
interest on the outstanding balance in accordance with the
following: (i) prime rate for prime loans;
(ii) U.S. base rate for U.S. based loans;
(iii) a fee of 1.125% per annum on bankers
acceptances; (iv) LIBOR plus 1.125% per annum for LIBOR
based loans; (v) a 1.125% annual fee for letters of credit;
and (vi) a 1.125% annual fee for letters of guaranty. Both
lululemon usa inc. and lululemon FC USA inc., Inc. provided
Royal Bank of Canada with guarantees and postponements of claims
in the amounts of CDN$20.0 million with respect to
lululemon athletica canada inc.s obligations under the
revolving credit facility. The revolving credit facility is also
secured by all of our present and after acquired personal
property, including all intellectual property and all of the
outstanding shares we own in our subsidiaries. As of
February 1, 2009, aside from the letters of credit and
guarantees, we had $nil in borrowings outstanding under this
credit facility.
Contractual
Obligations and Commitments
Leases. We lease certain corporate-owned store
locations, storage spaces, building and equipment under
non-cancelable operating leases. Our leases generally have
initial terms of between five and 10 years, and generally
can be extended only in five-year increments, if at all. Our
leases expire at various dates between 2009 and 2019, excluding
extensions at our option. A substantial number of our leases for
corporate-owned store premises include renewal options and
certain of our leases include rent escalation clauses, rent
holidays and leasehold rental incentives, none of which are
reflected in the following table. Most of our leases for
corporate-owned store premises also include contingent rental
payments based on sales volume, the impact of which also are not
reflected in the following table. During the third quarter of
fiscal 2008 we were released from our contractual obligation
related to the new store support center head office location in
Vancouver, British Columbia. The following table summarizes our
contractual arrangements as of February 1, 2009, and the
timing and effect that such commitments are expected to have on
our liquidity and cash flows in future periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Year Ending
|
|
|
|
Total
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
|
|
(In thousands)
|
|
|
Operating Leases (minimum rent)*
|
|
$
|
211,598
|
|
|
$
|
23,754
|
|
|
$
|
24,439
|
|
|
$
|
23,270
|
|
|
$
|
23,624
|
|
|
$
|
23,522
|
|
|
$
|
92,989
|
|
|
|
|
* |
|
Includes $250, $250 and $270 for each of the years ending in
2010, 2011 and thereafter for one store lease which was
terminated on May 15, 2007. |
Franchise Agreements. As of February 1,
2009, we operated five stores in North America and five stores
in Australia through franchise agreements. Under the terms of
our franchise agreements, unless otherwise approved by us,
franchisees are permitted to sell only lululemon athletica
products, are required to purchase their inventory from us,
which we sell at a slight premium to our cost, and are required
to pay us a royalty based on a percentage of their gross sales.
Additionally, under some of our franchise agreements, we have
the ability to repurchase franchises at a price equal to a
specified percentage of trailing
12-month
sales. During the year ended January 31, 2007, we and a
franchisee mutually terminated our franchise agreement. The
franchisee had commenced operations during the prior year. We
paid the franchisee a negotiated amount of $527,590 that was
recognized as a loss on the termination of the agreement and
charged to selling, general and administrative expenses. The
amount represented compensation for working capital that we
abandoned and the return of the initial franchise fee of $10,000.
44
Off-Balance
Sheet Arrangements
We enter into documentary letters of credit to facilitate the
international purchase of merchandise. We also enter into
standby letters of credit to secure certain of our obligations,
including insurance programs and duties related to import
purchases. As of February 1, 2009, letters of credit and
letters of guarantee totaling $1.7 million have been issued.
Other than these standby letters of credit, we do not have any
off-balance sheet arrangements, investments in special purpose
entities or undisclosed borrowings or debt. In addition, we have
not entered into any derivative contracts or synthetic leases.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions. Predicting future
events is inherently an imprecise activity and, as such,
requires the use of judgment. Actual results may vary from
estimates in amounts that may be material to the financial
statements. An accounting policy is deemed to be critical if it
requires an accounting estimate to be made based on assumptions
about matters that are highly uncertain at the time the estimate
is made, and if different estimates that reasonably could have
been used or changes in the accounting estimates that are
reasonably likely to occur periodically, could materially impact
our consolidated financial statements.
We believe that the following critical accounting policies
affect our more significant estimates and judgments used in the
preparation of our consolidated financial statements:
Revenue Recognition. Net revenue is comprised
of corporate-owned store net revenue, which includes sales to
customers through corporate-owned stores (including stores
operated by our majority-owned joint venture), franchise
licensing fees and royalties as well as sales of products to
franchisees, and other net revenue, which includes sales to
wholesale accounts, telephone sales, warehouse sales and sales
from company-operated showrooms, in each case, less returns and
discounts. Sales to customers through corporate-owned stores are
recognized at the point of sale, net of an estimated allowance
for sales returns. Franchise licensing fees and royalties are
recognized when earned, in accordance with the terms of the
franchise/license agreements. Royalties are based on a
percentage of the franchisees sales and recognized when
those sales occur. Franchise fee net revenue arising from the
sale of a franchise is recognized when the agreement has been
signed and all of our substantial obligations have been
completed. Other net revenue, generated by sales to wholesale
accounts, telephone sales, including related shipping and
handling charges, and showroom sales are recognized when those
sales occur, net of an estimated allowance for sales returns.
Other net revenue related to warehouse sales are recognized when
these sales occur. Amounts billed to customers for shipping and
handling are recognized at the time of shipment.
Sales are reported on a net revenue basis, which is computed by
deducting from our gross sales the amount of sales taxes, actual
product returns received, discounts and an amount established
for anticipated sales returns. Our estimated allowance for sales
returns is a subjective critical estimate that has a direct
impact on reported net revenue. This allowance is calculated
based on a history of actual returns, estimated future returns
and any significant future known or anticipated events.
Consideration of these factors results in an estimated allowance
for sales returns. Our standard terms for retail sales limit
returns to approximately 14 days after the sale of the
merchandise. For our wholesale sales, we allow returns from our
wholesale customers if properly requested and approved. Employee
discounts are classified as a reduction of net revenue. We
account for gift cards by recognizing a liability at the time a
gift card is sold, and recognizing net revenue at the time the
gift card is redeemed for merchandise. We review our gift card
liability on an ongoing basis and recognize our estimate of the
unredeemed gift card liability on a ratable basis over the
estimated period of redemption.
Accounts Receivable. Accounts receivable
primarily arise out of sales to wholesale accounts, sales of
products and royalties on sales owed to us by our franchises.
The allowance for doubtful accounts represents managements
best estimate of probable credit losses in accounts receivable.
This allowance is established based on the specific
circumstances associated with the credit risk of the receivable,
the size of the accounts receivable balance, aging of accounts
receivable balances and our collection history and other
relevant information. The
45
allowance for doubtful accounts is reviewed on a monthly basis.
Receivables are charged to the allowance when management
believes the account will not be recovered.
Inventory. Inventory is valued at the lower of
cost and market. Cost is determined using weighted-average
costs. For finished goods and
work-in-process,
market is defined as net realizable value, and for raw
materials, market is defined as replacement cost. Cost of
inventories includes all costs incurred to deliver inventory to
our distribution centers including freight, duty and other
landing costs. During fiscal 2006, we initiated a new purchasing
strategy that requires our manufacturers to acquire the raw
materials used in the manufacturing of our apparel products.
Because we will no longer be required to acquire these raw
materials, we expect raw materials and work in process
inventories to decline.
We periodically review our inventories and make provisions as
necessary to appropriately value obsolete or damaged goods. The
amount of the markdown is equal to the difference between the
book cost of the inventory and its estimated market value based
upon assumptions about future demands, selling prices and market
conditions. In fiscal 2008, we wrote-off $0.9 million of
inventory and in fiscal 2007 we wrote-off $0.8 million of
inventory.
Property and Equipment. Property and equipment
are recorded at cost less accumulated depreciation. Costs
related to software used for internal purposes are capitalized
in accordance with the provisions of the Statement of Position
98-1,
Accounting for Costs of Computer Software Developed or
Obtained for Internal Use whereby direct internal and
external costs incurred during the application development stage
or for upgrades that add functionality are capitalized. All
other costs related to internal use software are expensed as
incurred. Leasehold improvements are amortized on a
straight-line basis over the lesser of the length of the lease,
without consideration of option renewal periods and the
estimated useful life of the assets, up to a maximum of five
years. All other property and equipment are amortized using the
declining balance method as follows:
|
|
|
|
|
Furniture and fixtures
|
|
|
20
|
%
|
Computer hardware and software
|
|
|
30
|
%
|
Equipment and vehicles
|
|
|
30
|
%
|
We account for asset retirement obligations under FASB
Interpretation No. 47 (FIN 47),
Accounting for Conditional Asset Retirement
Obligations an interpretation of FASB Statement
No. 143. FIN 47 requires recognition of a
liability for the fair value of a required asset retirement
obligation (ARO) when such obligation is incurred.
Our AROs are primarily associated with leasehold improvements
which, at the end of a lease, we are contractually obligated to
remove in order to comply with the lease agreement. At the
inception of a lease with such conditions, we record an ARO
liability and a corresponding capital asset in an amount equal
to the estimated fair value of the obligation. The liability is
estimated based on a number of assumptions requiring
managements judgment, including store closing costs, cost
inflation rates and discount rates, and is accreted to its
projected future value over time. The capitalized asset is
depreciated using the convention for depreciation of leasehold
improvement assets. Upon satisfaction of the ARO conditions, any
difference between the recorded ARO liability and the actual
retirement costs incurred is recognized as an operating gain or
loss in the consolidated statements of earnings. Prior to fiscal
2008 these obligations were not material.
We account for lease termination costs under FASB Statement of
Financial Accounting Standards No. 146
(SFAS 146), Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146
requires a liability for a cost associated with an exit or
disposal activity to be recognized and measured initially at its
fair value in the period in which the liability is incurred. We
estimate fair value at the cease-use date of its operating
leases as the remaining lease rentals, reduced by estimated
sublease rentals that could be reasonably obtained for the
property, even where we does not intend to enter into a
sublease. Estimating the cost of certain lease exit costs
involves subjective assumptions, including the time it would
take to sublease the leased location and the related potential
sublease income. The estimated accruals for these costs could be
significantly affected if future experience differs from that
used in the initial estimate. Lease exit costs are included in
provision for impairment and lease exit costs.
46
Long-Lived Assets. Long-lived assets,
including intangible assets with finite useful lives, held for
use are evaluated for impairment when the occurrence of events
or changes in circumstances indicates that the carrying value of
the assets may not be recoverable as measured by comparing their
net book value to the estimated future cash flows generated by
their use and eventual disposition. Impaired assets are recorded
at fair value, determined principally by discounting the future
cash flows expected from their use and eventual disposition.
Reductions in asset values resulting from impairment valuations
are recognized in earnings in the period that the impairment is
determined. Long-lived assets, including intangible assets with
finite useful lives, held for sale are reported at the lower of
the carrying value of the asset and fair value less cost to
sell. Any write-downs to reflect fair value less selling cost is
recognized in income when the asset is classified as held for
sale. Gains or losses on assets held for sale and asset
dispositions are included in provision for impairment and lease
exit costs.
Income Taxes. We follow the liability method
with respect to accounting for income taxes. Deferred tax assets
and liabilities are determined based on temporary differences
between the carrying amounts and the tax basis of assets and
liabilities. Deferred income tax assets and liabilities are
measured using enacted tax rates that will be in effect when
these differences are expected to reverse. Deferred income tax
assets are reduced by a valuation allowance, if based on the
weight of available positive and negative evidence, it is more
likely than not that some portion or all of the deferred tax
assets will not be realized.
On February 1, 2007 the Company adopted the provisions of
Financial Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48), which
clarifies the accounting for uncertainty in income taxes
recognized in a companys financial statements in
accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes. FIN 48
prescribes a recognition threshold and measurement process for
recording in the financial statements uncertain tax positions
taken or expected to be taken in a tax return. Additionally,
FIN 48 provides guidance on the de-recognition,
classification, interest and penalties, accounting in interim
periods, and disclosure requirements for uncertain tax positions.
The recognition of a deferred income tax asset is based upon
several assumptions and management forecasts, including current
and proposed tax legislation, current and anticipated taxable
income, utilization of previously unrealized non-operating loss
carry forwards and regulatory reviews of tax filings. Given the
judgments and estimates required and the sensitivity of the
results to the significant assumptions used, we believe the
accounting estimates used in relation to the recognition of
deferred income tax assets are subject to measurement
uncertainty and are susceptible to a material change if the
underlying assumptions change.
We file income tax returns in the United States, Canada and
various foreign and state jurisdictions. We are subject to
income tax examination by tax authorities in all jurisdictions
from our inception to date. Our policy is to recognize interest
expense and penalties related to income tax matters as tax
expense. At February 1, 2009, we do not have any
significant accruals for interest related to unrecognized tax
benefits or tax penalties. Our intercompany transfer pricing
policies will be subject to audits by various foreign tax
jurisdictions. Although we believe that our intercompany
transfer pricing policies and tax positions are reasonable, the
final determination of tax audits or potential tax disputes may
be materially different from that which is reflected in our
income tax provisions and accruals.
Goodwill and Intangible Assets. Intangible
assets are recorded at cost. Non-competition agreements are
amortized on a straight-line basis over their estimated useful
life of five years. Reacquired franchise rights are amortized on
a straight-line basis over their estimated useful lives of
10 years. Goodwill represents the excess of the purchase
price over the fair market value of identifiable net assets
acquired and is not amortized. Goodwill and intangible assets
with indefinite useful lives are tested for impairment annually
or more frequently when an event or circumstance indicates that
goodwill or indefinite useful live intangible assets might be
impaired. We use our best estimates and judgment based on
available evidence in conducting the impairment testing. When
the carrying amount exceeds the fair value, an impairment loss
is recognized in an amount equal to the excess of the carrying
value over its fair market value.
Stock-Based Compensation. We account for
stock-based compensation using the fair value method as required
by Statement of Financial Accounting Standards
No. 123 (Revised 2004), Share Based
Payments (SFAS 123(R)). The fair value of
awards granted is estimated at the date of grant and recognized
as employee compensation expense on a straight-line basis over
the requisite service period with the offsetting credit to
47
additional paid-in capital. Our calculation of stock-based
compensation requires us to make a number of complex and
subjective estimates and assumptions, including future
forfeitures, stock price volatility, expected life of the
options and related tax effects. Prior to our initial public
offering, our board of directors determined the estimated fair
value of our common stock on the date of grant based on a number
of factors, most significantly our implied enterprise value
based upon the purchase price of our securities sold in December
2005 pursuant to an arms-length private placement to a group of
private equity investors. The estimation of stock awards that
will ultimately vest requires judgment, and to the extent actual
results differ from our estimates, such amounts will be recorded
as a cumulative adjustment in the period estimates are revised.
We consider several factors when estimating expected
forfeitures, such as types of awards, size of option holder
group and anticipated employee retention. Actual results may
differ substantially from these estimates. Expected volatility
of the stock is based on our review of companies we believe of
similar growth and maturity and our peer group in the industry
in which we do business because we do not have sufficient
historical volatility data for our own stock. The expected term
of options granted is derived from the output of the option
valuation model and represents the period of time that options
granted are expected to be outstanding. In the future, as we
gain historical data for volatility in our own stock and the
actual term employees hold our options, expected volatility and
expected term may change which could substantially change the
grant-date fair value of future awards of stock options and,
ultimately, the expense we record. For awards with service
and/or
performance conditions, the total amount of compensation expense
to be recognized is based on the number of awards that are
expected to vest and is adjusted to reflect those awards that do
ultimately vest. For awards with performance conditions, we
recognize the compensation expense over the requisite service
period as determined by a range of probability weighted
outcomes. For awards with market and or performance conditions,
all compensation expense is recognized if the underlying market
or performance conditions are fulfilled. Certain employees are
entitled to share-based awards from one of our stockholders.
These awards are accounted for as employee compensation expense
in accordance with the above noted policies. We commenced
applying SFAS 123(R) when we introduced share based awards
for our employees in the year ended January 31, 2006.
Recent
Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standard No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities
(SFAS 159). This Statement permits entities
to choose to measure various financial assets and financial
liabilities at fair value. Unrealized gains and losses on items
for which the fair value option has been elected are reported in
earnings. We adopted SFAS 159 on February 4, 2008 and
did not elect the fair value option for any of its eligible
financial assets or liabilities.
In September 2006, the FASB issued Statement of Financial
Accounting Standard No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value in
accordance with GAAP, and expands disclosures about fair value
measurements. SFAS 157 applies under other accounting
pronouncements that require or permit fair value measurements
and accordingly does not require any new fair value
measurements. The provisions of SFAS 157 are to be applied
prospectively as of the beginning of the fiscal year in which it
is initially applied, with any transition adjustment recognized
as a cumulative-effect adjustment to the opening balance of
retained earnings. The provisions of SFAS 157 are effective
for fiscal years beginning after November 15, 2007, however
the FASB has delayed the effective date of SFAS 157 to
fiscal years beginning after November 15, 2008 for
nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis. The adoption of
SFAS 157 for financial assets and liabilities in the first
two quarters of fiscal 2008 did not have a material impact on
our consolidated financial statements. We are currently
evaluating the impact of the adoption of SFAS 157 for
nonfinancial assets and nonfinancial liabilities on its
financial position and results of operations.
In December 2007, the FASB issued Statement of Financial
Accounting Standard No. 141R, Business Combinations
(revised 2007) (SFAS 141R). SFAS 141R
replaces SFAS 141 and requires the acquirer of a business
to recognize and measure the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the
acquiree at fair value. SFAS 141R also requires transaction
costs related to the business combination to be expensed as
incurred. SFAS 141R is effective for business combinations
for which the acquisition date is on or after fiscal years
beginning after December 15, 2008. We do not believe the
adoption of SFAS 141R will have a material impact on our
consolidated financial statements.
48
|
|
ITEM 7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Market risk represents the risk of loss that may impact our
financial position due to adverse changes in financial market
prices and rates. Our market risk exposure is primarily a result
of fluctuations in interest rates and foreign currency exchange
rates. We do not hold or issue financial instruments for trading
purposes.
Foreign Currency Exchange Risk. We currently
generate a majority of our net revenue in Canada. The reporting
currency for our consolidated financial statements is the
U.S. dollar. Historically, our operations were based
largely in Canada. As of February 1, 2009, we operated 42
stores in Canada. As a result, we have been impacted by changes
in exchange rates and may be impacted materially for the
foreseeable future. As we recognize net revenue from sales in
Canada in Canadian dollars, and the U.S. dollar has
strengthened during fiscal 2008, it has had a negative impact on
our Canadian operating results upon translation of those results
into U.S. dollars for the purposes of consolidation.
However, the loss in net revenue was partially offset by lower
cost of sales and lower selling, general and administrative
expenses that are generated in Canadian dollars. The 2%
depreciation in the relative value of the U.S. dollar
compared to the Canadian dollar in fiscal 2008 versus fiscal
2007 has resulted in lost income from operations of
approximately $3.7 million for fiscal 2008. To the extent
the ratio between our net revenue generated in Canadian dollars
increases as compared to our expenses generated in Canadian
dollars, we expect that our results of operations will be
further impacted by changes in exchange rates. We do not
currently hedge foreign currency fluctuations. However, in the
future, in an effort to mitigate losses associated with these
risks, we may at times enter into derivative financial
instruments, although we have not historically done so. We do
not, and do not intend to, engage in the practice of trading
derivative securities for profit.
Interest Rate Risk. In April 2007, we entered
into an uncommitted senior secured demand revolving credit
facility with Royal Bank of Canada. The revolving credit
facility provides us with available borrowings in an amount up
to CDN$20.0 million. Because our revolving credit facility
bears interest at a variable rate, we will be exposed to market
risks relating to changes in interest rates, if we have a
meaningful outstanding balance. As of February 1, 2009, we
had no outstanding borrowings under our revolving facility. We
had small outstanding balances under our revolving facility
during fiscal 2008 as we built inventory and working capital for
the holiday selling season, but we do not believe we are
significantly exposed to changes in interest rate risk. We
currently do not engage in any interest rate hedging activity
and currently have no intention to do so in the foreseeable
future. However, in the future, if we have a meaningful
outstanding balance under our revolving facility, in an effort
to mitigate losses associated with these risks, we may at times
enter into derivative financial instruments, although we have
not historically done so. These may take the form of forward
sales contracts, option contracts, and interest rate swaps. We
do not, and do not intend to, engage in the practice of trading
derivative securities for profit.
Inflation
Inflationary factors such as increases in the cost of our
product and overhead costs may adversely affect our operating
results. Although we do not believe that inflation has had a
material impact on our financial position or results of
operations to date, a high rate of inflation in the future may
have an adverse effect on our ability to maintain current levels
of gross margin and selling, general and administrative expenses
as a percentage of net revenue if the selling prices of our
products do not increase with these increased costs.
49
|
|
ITEM 8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
lululemon
athletica inc. and Subsidiaries
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Consolidated Financial Statements:
|
|
|
|
|
|
|
|
51
|
|
|
|
|
52
|
|
|
|
|
53
|
|
|
|
|
54
|
|
|
|
|
55
|
|
|
|
|
56
|
|
50
INDEPENDENT
AUDITORS REPORT
To the Board of Directors and Shareholders of lululemon
athletica inc.
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations,
stockholders equity and cash flows present fairly, in all
material respects, the financial position of lululemon athletica
inc. as at February 1, 2009 and February 3, 2008, and
the results of its operations and its cash flows for each of the
years in the three year period ended February 1, 2009 in
conformity with accounting principles generally accepted in the
United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control
over financial reporting as at February 1, 2009, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in
Managements Annual Report on Internal Control Over
Financial Reporting under Item 9A of its Annual Report on
Form 10-K.
Our responsibility is to express an opinion on these financial
statements and an opinion on the Companys internal control
over financial reporting based on our audits (which was an
integrated audit for the year ended February 1, 2009). We
conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
Chartered Accountants
Vancouver, BC
March 25, 2009
51
lululemon
athletica inc. and Subsidiaries
|
|
|
|
|
|
|
|
|
|
|
February 1,
|
|
|
February 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
56,796,981
|
|
|
$
|
52,544,971
|
|
Accounts receivable
|
|
|
4,029,032
|
|
|
|
4,302,430
|
|
Inventories
|
|
|
52,050,891
|
|
|
|
37,931,990
|
|
Prepaid expenses and other current assets
|
|
|
4,111,024
|
|
|
|
2,518,692
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
3,038,498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,987,928
|
|
|
|
100,336,581
|
|
Property and equipment, net
|
|
|
61,661,813
|
|
|
|
43,604,970
|
|
Goodwill and intangible assets, net
|
|
|
8,160,334
|
|
|
|
8,118,588
|
|
Deferred income taxes
|
|
|
19,373,559
|
|
|
|
1,124,595
|
|
Other non-current assets
|
|
|
5,452,735
|
|
|
|
1,907,503
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
211,636,369
|
|
|
$
|
155,092,237
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,269,423
|
|
|
$
|
5,397,102
|
|
Accrued liabilities
|
|
|
22,103,034
|
|
|
|
7,247,055
|
|
Accrued compensation and related expenses
|
|
|
5,861,807
|
|
|
|
7,986,463
|
|
Income taxes payable
|
|
|
2,133,036
|
|
|
|
5,719,804
|
|
Unredeemed gift card liability
|
|
|
9,277,536
|
|
|
|
8,113,953
|
|
Other current liabilities
|
|
|
690,081
|
|
|
|
780,851
|
|
Liabilities of discontinued operations
|
|
|
|
|
|
|
895,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,334,917
|
|
|
|
36,140,477
|
|
Other non-current liabilities
|
|
|
11,300,713
|
|
|
|
6,721,213
|
|
Deferred income taxes
|
|
|
158,054
|
|
|
|
196,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,793,684
|
|
|
|
43,058,228
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Undesignated preferred stock, $0.01 par value,
5,000,000 shares authorized, none issued and outstanding
|
|
|
|
|
|
|
|
|
Exchangeable stock, no par value, 30,000,000 shares
authorized, issued and outstanding 19,517,370 and 20,935,041
|
|
|
|
|
|
|
|
|
Special voting stock, $0.00001 par value,
30,000,000 shares authorized, issued and outstanding
19,517,370 and 20,935,041
|
|
|
195
|
|
|
|
209
|
|
Common stock, $0.01 par value, 200,000,000 shares
authorized, issued and outstanding 50,422,315 and 46,684,700
|
|
|
504,223
|
|
|
|
466,847
|
|
Additional paid-in capital
|
|
|
155,960,785
|
|
|
|
136,004,955
|
|
Retained earnings
|
|
|
9,528,271
|
|
|
|
(29,834,956
|
)
|
Accumulated other comprehensive income
|
|
|
(11,150,789
|
)
|
|
|
5,396,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
154,842,685
|
|
|
|
112,034,009
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
211,636,369
|
|
|
$
|
155,092,237
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
52
lululemon
athletica inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 1,
|
|
|
February 3,
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Net revenue
|
|
$
|
353,488,212
|
|
|
$
|
269,942,362
|
|
|
$
|
147,964,195
|
|
Cost of goods sold
|
|
|
174,420,844
|
|
|
|
125,014,988
|
|
|
|
72,249,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
179,067,368
|
|
|
|
144,927,374
|
|
|
|
75,714,694
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
|
118,098,347
|
|
|
|
93,376,167
|
|
|
|
51,862,736
|
|
Provision for impairment and lease exit costs
|
|
|
4,404,855
|
|
|
|
|
|
|
|
|
|
Settlement of lawsuit
|
|
|
|
|
|
|
|
|
|
|
7,228,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
56,564,166
|
|
|
|
51,551,207
|
|
|
|
16,623,648
|
|
Other income (expense), net
|
|
|
821,412
|
|
|
|
1,029,118
|
|
|
|
104,404
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
57,385,578
|
|
|
|
52,580,325
|
|
|
|
16,728,052
|
|
Provision for income taxes
|
|
|
16,883,986
|
|
|
|
20,464,444
|
|
|
|
8,751,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
40,501,592
|
|
|
|
32,115,881
|
|
|
|
7,976,377
|
|
Net loss from discontinued operations
|
|
|
(1,138,365
|
)
|
|
|
(1,273,429
|
)
|
|
|
(310,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
39,363,227
|
|
|
$
|
30,842,452
|
|
|
$
|
7,666,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.59
|
|
|
$
|
0.48
|
|
|
$
|
0.12
|
|
Discontinued operations
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net basic earnings per share
|
|
$
|
0.57
|
|
|
$
|
0.46
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.57
|
|
|
$
|
0.47
|
|
|
$
|
0.12
|
|
Discontinued operations
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net diluted earnings per share
|
|
$
|
0.55
|
|
|
$
|
0.45
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average number of shares outstanding
|
|
|
68,710,746
|
|
|
|
66,430,022
|
|
|
|
65,156,625
|
|
Diluted weighted-average number of shares outstanding
|
|
|
70,942,424
|
|
|
|
69,297,878
|
|
|
|
65,303,839
|
|
See accompanying notes to the consolidated financial statements
53
lululemon
athletica inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Special Voting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Exchangeable Stock
|
|
|
Stock
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Par
|
|
|
|
|
|
Par
|
|
|
|
|
|
Par
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Total
|
|
|
Balance at January 31, 2006
|
|
|
20,935,041
|
|
|
$
|
|
|
|
|
20,935,041
|
|
|
$
|
209
|
|
|
|
44,152,390
|
|
|
$
|
441,524
|
|
|
$
|
95,395,034
|
|
|
$
|
(68,343,726
|
)
|
|
$
|
558,743
|
|
|
$
|
28,051,784
|
|
Stock issued for cash and services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138,388
|
|
|
|
1,384
|
|
|
|
633,043
|
|
|
|
|
|
|
|
|
|
|
|
634,427
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,666,331
|
|
|
|
|
|
|
|
7,666,331
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,615,308
|
)
|
|
|
(1,615,308
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,051,023
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,641,564
|
|
|
|
|
|
|
|
|
|
|
|
2,641,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2007
|
|
|
20,935,041
|
|
|
$
|
|
|
|
|
20,935,041
|
|
|
$
|
209
|
|
|
|
44,290,778
|
|
|
$
|
442,908
|
|
|
$
|
98,669,641
|
|
|
$
|
(60,677,395
|
)
|
|
$
|
(1,056,565
|
)
|
|
$
|
37,378,798
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,842,439
|
|
|
|
|
|
|
|
30,842,439
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,453,519
|
|
|
|
6,453,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,295,958
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,947,097
|
|
|
|
|
|
|
|
|
|
|
|
5,947,097
|
|
Common stock issued for cash net of transaction costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,290,909
|
|
|
|
22,909
|
|
|
|
31,334,598
|
|
|
|
|
|
|
|
|
|
|
|
31,357,507
|
|
Restricted stock issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,458
|
|
|
|
105
|
|
|
|
(105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,555
|
|
|
|
925
|
|
|
|
53,724
|
|
|
|
|
|
|
|
|
|
|
|
54,649
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 3, 2008
|
|
|
20,935,041
|
|
|
$
|
|
|
|
|
20,935,041
|
|
|
$
|
209
|
|
|
|
46,684,700
|
|
|
$
|
466,847
|
|
|
$
|
136,004,955
|
|
|
$
|
(29,834,956
|
)
|
|
$
|
5,396,954
|
|
|
$
|
112,034,009
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,363,227
|
|
|
|
|
|
|
|
39,363,227
|
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,547,743
|
)
|
|
|
(16,547,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,815,484
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,532,308
|
|
|
|
|
|
|
|
|
|
|
|
6,532,308
|
|
Excess tax benefit from stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,024,413
|
|
|
|
|
|
|
|
|
|
|
|
12,024,413
|
|
Common stock issued upon exchange of exchangeable shares
|
|
|
(1,417,671
|
)
|
|
|
|
|
|
|
(1,417,671
|
)
|
|
|
(14
|
)
|
|
|
1,417,671
|
|
|
|
14,177
|
|
|
|
(14,163
|
)
|
|
|
|
|
|
|
|
|
|
|
1,436,471
|
|
Restricted stock issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,321
|
|
|
|
93
|
|
|
|
(93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,310,623
|
|
|
|
23,106
|
|
|
|
1,413,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 1, 2009
|
|
|
19,517,370
|
|
|
$
|
|
|
|
|
19,517,370
|
|
|
$
|
195
|
|
|
|
50,422,315
|
|
|
$
|
504,223
|
|
|
$
|
155,960,785
|
|
|
$
|
9,528,271
|
|
|
$
|
(11,150,789
|
)
|
|
$
|
154,842,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
54
,
lululemon
athletica inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
February 1,
|
|
|
February 3,
|
|
|
January 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
39,363,227
|
|
|
$
|
30,842,452
|
|
|
$
|
7,666,331
|
|
Net loss from discontinued operations
|
|
|
1,138,365
|
|
|
|
1,273,429
|
|
|
|
310,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
|
40,501,592
|
|
|
|
32,115,881
|
|
|
|
7,976,377
|
|
Items not affecting cash
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
15,822,950
|
|
|
|
8,291,254
|
|
|
|
4,586,646
|
|
Stock-based compensation
|
|
|
6,532,308
|
|
|
|
5,947,097
|
|
|
|
2,641,564
|
|
Provision for impairment and lease exit costs
|
|
|
4,404,855
|
|
|
|
|
|
|
|
229,950
|
|
Deferred income taxes
|
|
|
(6,441,402
|
)
|
|
|
1,798,882
|
|
|
|
(3,076,876
|
)
|
Excess tax benefits from stock-based compensation
|
|
|
(12,024,413
|
)
|
|
|
|
|
|
|
|
|
Other, including net changes in other non-cash balances
|
|
|
(3,363,035
|
)
|
|
|
(9,034,274
|
)
|
|
|
13,903,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activity continuing
operations
|
|
|
45,432,855
|
|
|
|
39,118,840
|
|
|
|
26,260,780
|
|
Net cash provided by (used in) operating activity
discontinued operations
|
|
|
1,004,919
|
|
|
|
(2,638,301
|
)
|
|
|
840,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,437,774
|
|
|
|
36,480,539
|
|
|
|
25,448,814
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(40,530,459
|
)
|
|
|
(29,126,067
|
)
|
|
|
(12,532,013
|
)
|
Investment in and advances to franchises
|
|
|
(2,863,353
|
)
|
|
|
|
|
|
|
|
|
Acquisition of franchises
|
|
|
(3,401,633
|
)
|
|
|
(5,559,179
|
)
|
|
|
(511,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activity continuing
operations
|
|
|
(46,795,445
|
)
|
|
|
(34,685,246
|
)
|
|
|
(13,043,863
|
)
|
Net cash used in investing activity discontinued
operations
|
|
|
|
|
|
|
(549,873
|
)
|
|
|
(305,807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46,795,445
|
)
|
|
|
(35,235,119
|
)
|
|
|
(13,349,670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
1,436,471
|
|
|
|
54,649
|
|
|
|
|
|
Excess tax benefits from stock-based compensation
|
|
|
12,024,413
|
|
|
|
|
|
|
|
|
|
Payment of initial public offering costs
|
|
|
|
|
|
|
(6,992,309
|
)
|
|
|
|
|
Funds received from principal stockholder loan
|
|
|
|
|
|
|
|
|
|
|
222,440
|
|
Capital stock issued for cash
|
|
|
|
|
|
|
38,349,817
|
|
|
|
446,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activity continuing
operations
|
|
|
13,460,884
|
|
|
|
31,412,157
|
|
|
|
668,859
|
|
Net cash provided by financing activity discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,460,884
|
|
|
|
31,412,157
|
|
|
|
668,859 ,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
(8,851,203
|
)
|
|
|
4,393,563
|
|
|
|
(616,486
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
|
4,252,010
|
|
|
|
37,051,140
|
|
|
|
12,151,517
|
|
Cash and cash equivalents from continuing operations, beginning
of year
|
|
$
|
52,544,971
|
|
|
$
|
15,493,831
|
|
|
$
|
3,877,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents from continuing operations, end of year
|
|
$
|
56,796,981
|
|
|
$
|
52,544,971
|
|
|
$
|
15,493,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the consolidated financial statements
55
lululemon
athletica inc. and Subsidiaries
|
|
1
|
NATURE OF
OPERATIONS AND BASIS OF PRESENTATION
|
Nature
of operations
lululemon athletica inc., a Delaware corporation
(lululemon or LAI and, together with its
subsidiaries unless the context otherwise requires, the
Company) is engaged in the design, manufacture and
distribution of healthy lifestyle inspired athletic apparel,
which is sold through a chain of corporate-owned and operated
retail stores, independent franchises and a network of wholesale
accounts. The Companys primary markets are Canada, the
United States and Australia, where 42, 61 and nil
corporate-owned stores were in operation as at February 1,
2009, respectively. There were 103, 71 and 41 corporate-owned
stores in operation as at February 1, 2009,
February 3, 2008 and January 31, 2007 respectively.
Basis
of presentation
The accompanying consolidated financial statements include the
financial position, results of operations and cash flows of the
Company and its subsidiary companies during the three-year
period ended February 1, 2009. The consolidated financial
statements have been prepared using the U.S. dollar and are
presented in accordance with United States generally accepted
accounting principles (GAAP).
The Company reorganized its corporate structure on July 26,
2007 (note 10). This reorganization was accounted for as a
transfer of entities under common control, and accordingly, the
financial statements for periods prior to the reorganization
have been restated on an as if pooling basis. Prior
to the reorganization, the Company had prepared combined
consolidated financial statements combining LAI and LIPO
Investments (Canada) Inc. (LIPO).
The Company has experienced, and expects to continue to
experience, significant seasonal variations in net revenue and
income from operations. Seasonal variations in revenue are
primarily related to increased sales of products during the
fiscal fourth quarter, reflecting historical strength in sales
during the holiday season. Historically, seasonal variations in
income from operations have been driven principally by increased
net revenue in the fiscal fourth quarter.
Through fiscal 2006, the Companys fiscal year ended on
January 31st in the year following the year mentioned.
Commencing with fiscal 2007, the Companys fiscal year will
end on the Sunday closest to January 31st of the following year,
typically resulting in a fifty-two week year, but occasionally
giving rise to an additional week, resulting in a fifty-three
week year. Fiscal 2008, 2007 and 2006 ended on February 1,
2009, February 3, 2008 and January 31, 2007,
respectively.
|
|
2
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles
of consolidation
The consolidated financial statements include the accounts of
lululemon athletica inc. and its wholly-owned subsidiaries. The
results of operations of Lululemon Japan Inc., are presented as
discontinued operations following the Companys
wind-up of
operations in Japan in the first quarter of fiscal 2008. All
inter-company balances and transactions have been eliminated. In
the opinion of management, all adjustments, consisting primarily
of normal recurring accruals, considered necessary for a fair
presentation of the Companys results of operations for the
periods reported and of its financial condition as of the date
of the balance sheet have been included.
Cash
and cash equivalents
Cash and cash equivalents consist of cash on hand, bank balances
and short-term deposits with original maturities of less than
three months. The Company has not experienced any losses related
to these balances, and management believes its credit risk to be
minimal.
56
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accounts
receivable
Accounts receivable primarily arise out of sales to wholesale
accounts, sales of material, royalties on sales owed to the
Company by its franchisees and landlord deferred lease
inducements. The allowance for doubtful accounts represents
managements best estimate of probable credit losses in
accounts receivable and is reviewed monthly. Receivables are
written off against the allowance when management believes that
the amount receivable will not be recovered. As at
February 1, 2009, February 3, 2008 and
January 31, 2007 the Company recorded an insignificant
allowance for doubtful accounts.
Inventories
Inventories, consisting of finished goods and raw materials, are
stated at the lower of cost and market value. Cost is determined
using weighted-average costs. For finished goods, market is
defined as net realizable value, and for raw materials, market
is defined as replacement cost. Cost of inventories includes
acquisition and production costs including raw material and
labor, as applicable, and all costs incurred to deliver
inventory to the Companys distribution centers including
freight, non-refundable taxes, duty and other landing costs.
The Company periodically reviews its inventories and makes
provisions as necessary to appropriately value obsolete or
damaged goods. The amount of the provision is equal to the
difference between the cost of the inventory and its estimated
net realizable value based upon assumptions about future demand,
selling prices and market conditions. In addition, as part of
inventory valuations, the Company reviews for inventory
shrinkage based on historical trends from actual physical
inventories. Inventory shrinkage estimates are made to reduce
the inventory value for lost or stolen items. The Company
performs physical inventory counts throughout the year and
adjusts the shrink reserve accordingly.
Property
and equipment
Property and equipment are recorded at cost less accumulated
depreciation. Costs related to software used for internal
purposes are capitalized in accordance with the provisions of
the Statement of Position
98-1,
Accounting for Costs of Computer Software Developed or
Obtained for Internal Use, whereby direct internal and
external costs incurred during the application development stage
or for upgrades that add functionality are capitalized. All
other costs related to internal use software are expensed as
incurred.
Leasehold improvements are amortized on a straight-line basis
over the lesser of the length of the lease, without
consideration of option renewal periods, and the estimated
useful life of the assets, to a maximum of five years. All other
property and equipment are amortized using the declining balance
method as follows. Amortization commences when an asset is ready
for its intended use.
|
|
|
|
|
Furniture and fixtures
|
|
|
20
|
%
|
Computer hardware and software
|
|
|
30
|
%
|
Equipment and vehicles
|
|
|
30
|
%
|
Goodwill
and intangible assets
Intangible assets are recorded at cost. Non-competition
agreements are amortized on a straight-line basis over their
estimated useful life of five years. Reacquired franchise rights
are amortized on a straight-line basis over their estimated
useful lives of 10 years.
Goodwill represents the excess of the purchase price over the
fair market value of identifiable net assets acquired and is not
amortized. Goodwill and intangible assets with indefinite lives
are tested annually for impairment or more frequently when an
event or circumstance indicates that goodwill of indefinite life
intangible assets might be impaired. The Companys
operating segment for goodwill is its corporate-owned stores.
57
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Impairment
of long-lived assets
Long-lived assets, including intangible assets with finite
lives, held for use are evaluated for impairment when the
occurrence of events or a change in circumstances indicates that
the carrying value of the assets may not be recoverable as
measured by comparing their carrying value to the estimated
future cash flows generated by their use and eventual
disposition. Impaired assets are recorded at fair value,
determined principally by discounting the future cash flows
expected from their use and eventual disposition. Reductions in
asset values resulting from impairment valuations are recognized
in income in the period that the impairment is determined.
Long-lived assets, including intangible assets with finite
lives, held for sale are reported at the lower of the carrying
value of the asset and fair value less cost to sell. Any
write-downs to reflect fair value less selling cost is
recognized in income when the asset is classified as held for
sale. Gains or losses on assets held for sale and asset
dispositions are included in provision for impairment and lease
exit costs.
Leased
property and equipment
The Company leases corporate-owned stores, distribution centers
and administrative offices. Minimum rental payments, including
any fixed escalation of rental payments and rent premiums, are
amortized on a straight-line basis over the life of the lease
beginning on the possession date. Rental costs incurred during a
construction period, prior to store opening, are recognized as
rental expense. The difference between the recognized rental
expense and the total rental payments paid is reflected on the
consolidated balance sheet as a deferred lease liability or a
prepaid lease asset.
Deferred lease inducements, which include leasehold improvements
paid for by the landlord and free rent, are recorded as
liabilities on the consolidated balance sheet and recognized as
a reduction of rent expense on a straight-line basis over the
term of the lease.
Contingent rental payments based on sales volumes are recorded
in the period in which the sales occur.
The Company accounts for asset retirement obligations under FASB
Interpretation No. 47 (FIN 47),
Accounting for Conditional Asset Retirement
Obligations an interpretation of FASB Statement
No. 143. FIN 47 requires recognition of a
liability for the fair value of a required asset retirement
obligation (ARO) when such obligation is incurred.
The Companys AROs are primarily associated with leasehold
improvements which, at the end of a lease, the Company is
contractually obligated to remove in order to comply with the
lease agreement. At the inception of a lease with such
conditions, the Company records an ARO liability and a
corresponding capital asset in an amount equal to the estimated
fair value of the obligation. The liability is estimated based
on a number of assumptions requiring managements judgment,
including store closing costs, cost inflation rates and discount
rates, and is accreted to its projected future value over time.
The capitalized asset is depreciated using the convention for
depreciation of leasehold improvement assets. Upon satisfaction
of the ARO conditions, any difference between the recorded ARO
liability and the actual retirement costs incurred is recognized
as an operating gain or loss in the consolidated statements of
earnings. Prior to fiscal 2008 these obligations were not
material.
The Company accounts for lease termination costs under FASB
Statement of Financial Accounting Standards No. 146
(SFAS 146), Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146
requires a liability for a cost associated with an exit or
disposal activity to be recognized and measured initially at its
fair value in the period in which the liability is incurred. The
Company estimates fair value at the cease-use date of its
operating leases as the remaining lease rentals, reduced by
estimated sublease rentals that could be reasonably obtained for
the property, even where the Company does not intend to enter
into a sublease. Estimating the cost of certain lease exit costs
involves subjective assumptions, including the time it would
take to sublease the leased location and the related potential
sublease income. The estimated accruals for these costs could be
significantly affected if future experience differs from that
used in the initial estimate. Lease exit costs are included in
provision for impairment and lease exit costs.
58
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred
revenue
Payments received from franchisees for goods not shipped as well
as receipts from the sale of gift cards are treated as deferred
revenue. Franchise inventory deposits are included in other
current liabilities and recognized as sales when the goods are
shipped. Amounts received in respect of gift cards are recorded
as unredeemed gift card liability. When gift cards are redeemed
for apparel, the Company recognizes the related revenue.
Revenue
recognition
Sales revenue includes sales of apparel to customers through
corporate-owned and operated retail stores, phone sales, sales
through a network of wholesale accounts, initial license and
franchise fees, royalties from franchisees and sales of apparel
to franchisees.
Sales to customers through corporate-owned retail stores and
phone sales are recognized at the point of sale, net of an
estimated allowance for sales returns.
Initial license and franchise fees are recognized when all
material services or conditions relating to the sale of a
franchise right have been substantially performed or satisfied
by the Company, provided collection is reasonably assured.
Substantial performance is considered to occur when the
franchisee commences operations. Franchise royalties are
calculated as a percentage of franchise sales and are recognized
in the month that the franchisee makes the sale.
Sales of apparel to franchisees and wholesale accounts are
recognized when goods are shipped and collection is reasonably
assured.
All revenues are reported net of sales taxes collected for
various governmental agencies.
Cost
of goods sold
Cost of goods sold includes the cost of merchandise, including
in-bound freight, duty and nonrefundable taxes incurred in
delivering the goods to the Companys distribution centers.
It also includes all occupancy costs such as minimum rent,
contingent rent where applicable, property taxes, utilities and
depreciation expense for the Companys corporate-owned
store locations and all costs incurred in operating the
Companys distribution centers and production and design
departments. Production, design and distribution center costs
include salaries and benefits as well as operating expenses,
which include occupancy costs and depreciation expense for the
Companys distribution centers.
Store
pre-opening costs
Operating costs incurred prior to the opening of new stores are
expensed as incurred.
Income
taxes
The Company follows the liability method with respect to
accounting for income taxes. Deferred tax assets and liabilities
are determined based on temporary differences between the
carrying amounts and the tax basis of assets and liabilities.
Deferred income tax assets and liabilities are measured using
enacted tax rates that will be in effect when these differences
are expected to reverse. Deferred income tax assets are reduced
by a valuation allowance, if based on the weight of available
evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized.
On February 1, 2007 the Company adopted the provisions of
Financial Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48), which
clarifies the accounting for uncertainty in income taxes
recognized in a companys financial statements in
accordance with Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes. FIN 48
prescribes a recognition threshold and measurement process for
recording in
59
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the financial statements uncertain tax positions taken or
expected to be taken in a tax return. Additionally, FIN 48
provides guidance on the de-recognition, classification,
interest and penalties, accounting in interim periods, and
disclosure requirements for uncertain tax positions.
The recognition of a deferred income tax asset is based
primarily on managements forecasts, including current and
proposed tax legislation, current and anticipated taxable
income, utilization of previously unrealized non-operating loss
carryforwards and regulatory reviews of tax filings. Given the
judgments and estimates required and the sensitivity of the
results to the significant assumptions used, the accounting
estimates used in relation to the recognition of deferred income
tax assets are subject to measurement uncertainty and are
susceptible to a material change if the underlying assumptions
change.
We file income tax returns in the United States, Canada and
various foreign and state jurisdictions. We are subject to
income tax examination by tax authorities in all jurisdictions
from our inception to date. Our policy is to recognize interest
expense and penalties related to income tax matters as tax
expense. At February 1, 2009, we do not have any
significant accruals for interest related to unrecognized tax
benefits or tax penalties. Our intercompany transfer pricing
policies will be subject to audits by various foreign tax
jurisdictions. Although we believe that our intercompany
transfer pricing policies and tax positions are reasonable, the
final determination of tax audits or potential tax disputes may
be materially different from that which is reflected in our
income tax provisions and accruals.
Currency
translation
The functional currency for each entity included in these
consolidated financial statements that is domiciled outside of
the United States (the foreign entities) is the applicable local
currency. Assets and liabilities of each foreign entity are
translated into U.S. dollars at the exchange rate in effect
on the balance sheet date. Revenues and expenses are translated
at the average rate in effect during the period. Unrealized
translation gains and losses are recorded as a cumulative
translation adjustment, which is included in other comprehensive
income or loss, which is a component of accumulated other
comprehensive income included in stockholders equity.
Foreign currency transactions denominated in a currency other
than an entitys functional currency are remeasured into
the functional currency with any resulting gains and losses
included in income, except for gains and losses arising on
intercompany foreign currency transactions that are of a
long-term investment nature.
Fair
value of financial instruments
The Companys financial instruments consist of cash and
cash equivalents, accounts receivable, due from related parties,
advances to and investments in franchise trade accounts payable,
accrued liabilities, other liabilities, and due to related
parties. Unless otherwise noted, it is managements opinion
that the Company is not exposed to significant interest,
currency or credit risks arising from these financial
instruments. All foreign exchange gains or losses were recorded
in the income statement under selling, general and
administrative expenses. The fair value of these financial
instruments approximates their carrying value, unless otherwise
noted.
Foreign
exchange risk
A significant portion of the Companys sales are
denominated in Canadian dollars. The Companys exposure to
foreign exchange risk is mainly related to fluctuations between
the Canadian dollar and the U.S. dollar. This exposure is
partly mitigated by a natural hedge in that a significant
portion of the Companys operating costs are also
denominated in Canadian dollars. The Company is also exposed to
changes in interest rates. The Company does not hedge foreign
currency and interest rate exposure in a manner that would
entirely eliminate the effect of changes in foreign currency
exchange rates, or interest rates on net income and cash flows.
60
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The aggregate foreign exchange gains (losses) included in income
amount to $(109,831), $(543,350) and $183,471 for the years
ended February 1, 2009, February 3, 2008 and
January 31, 2007, respectively.
Concentration
of credit risk
The Company is not exposed to significant credit risk on its
cash and cash equivalents and trade accounts receivable. Cash
and cash equivalents are held with high quality financial
institutions. Trade accounts receivable are primarily from
certain franchisees and wholesale accounts. The Company does not
require collateral to support the trade accounts receivable;
however, in certain circumstances, the Company may require
parties to provide payment for goods prior to delivery of the
goods. The accounts receivable are net of an allowance for
doubtful accounts, which is established based on
managements assessment of the credit risks of the
underlying accounts.
Stock-based
compensation
The Company accounts for stock-based compensation using the fair
value method as required by Statement of Financial Accounting
Standards No. 123 (Revised 2004),
Share Based Payments
(SFAS 123(R)). The fair value of awards
granted is estimated at the date of grant and recognized as
employee compensation expense on a straight-line basis over the
requisite service period with the offsetting credit to
additional paid-in capital. For awards with service
and/or
performance conditions, the total amount of compensation expense
to be recognized is based on the number of awards expected to
vest and is adjusted to reflect those awards that do ultimately
vest. For awards with performance conditions, the Company
recognizes the compensation expense if and when the Company
concludes that it is probable that the performance condition
will be achieved. The Company reassesses the probability of
achieving the performance condition at each reporting date. For
awards with market conditions, all compensation expense is
recognized irrespective of whether such conditions are met.
Certain employees are entitled to share-based awards from the
principal stockholder of the Company. These awards are accounted
for by the Company as employee compensation expense in
accordance with the above-noted policies.
Earnings
per share
Earnings per share is calculated using the weighted-average
number of common shares outstanding during the period. Diluted
earnings per share is calculated by dividing net income
available to common stockholders for the period by the diluted
weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects the potential
dilution from common shares issuable through stock options using
the treasury stock method.
Use of
estimates
The preparation of financial statements in conformity with
generally accepted accounting principles in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of
the financial statements as well as the reported amounts of
revenues and expenses during the reporting period.
Recently
issued accounting standards
In February 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standard No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities
(SFAS 159). This Statement permits entities
to choose to measure various financial assets and financial
liabilities at fair value. Unrealized gains and losses on items
for which the fair value option has been elected are reported in
earnings. The Company adopted SFAS 159 on February 4,
2008 and did not elect the fair value option for any of its
eligible financial assets or liabilities.
61
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In September 2006, the FASB issued Statement of Financial
Accounting Standard No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 defines fair
value, establishes a framework for measuring fair value in
accordance with GAAP, and expands disclosures about fair value
measurements. SFAS 157 applies under other accounting
pronouncements that require or permit fair value measurements
and accordingly does not require any new fair value
measurements. The provisions of SFAS 157 are to be applied
prospectively as of the beginning of the fiscal year in which it
is initially applied, with any transition adjustment recognized
as a cumulative-effect adjustment to the opening balance of
retained earnings. The provisions of SFAS 157 are effective
for fiscal years beginning after November 15, 2007, however
the SFASB has delayed the effective date of SFAS 157 to
fiscal years beginning after November 15, 2008 for
nonfinancial assets and nonfinancial liabilities, except for
items that are recognized or disclosed at fair value in the
financial statements on a recurring basis. The adoption of
SFAS 157 for financial assets and liabilities in the first
two quarters of fiscal 2008 did not have a material impact on
the Companys consolidated financial statements. The
Company is currently evaluating the impact of the adoption of
SFAS 157 for nonfinancial assets and nonfinancial
liabilities on its financial position and results of operations.
In December 2007, the FASB issued Statement of Financial
Accounting Standard No. 141R, Business Combinations
(revised 2007) (SFAS 141R). SFAS 141R
replaces SFAS 141 and requires the acquirer of a business
to recognize and measure the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the
acquiree at fair value. SFAS 141R also requires transaction
costs related to the business combination to be expensed as
incurred. SFAS 141R is effective for business combinations
for which the acquisition date is on or after fiscal years
beginning after December 15, 2008. The Company does not
believe the adoption of SFAS 141R will have a material
impact on its consolidated financial statements.
Comparability
Certain comparative amounts have been reclassified to conform to
the presentation adopted in the current period.
|
|
|
|
|
|
|
|
|
|
|
February 1,
|
|
|
February 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
Finished goods
|
|
$
|
52,827,534
|
|
|
$
|
37,885,720
|
|
Raw materials
|
|
|
558,100
|
|
|
|
541,650
|
|
Provision to reduce inventory to market value
|
|
|
(1,334,743
|
)
|
|
|
(495,380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
52,050,891
|
|
|
$
|
37,931,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1,
|
|
|
February 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
Leasehold improvements
|
|
$
|
52,100,706
|
|
|
$
|
32,922,397
|
|
Furniture and fixtures
|
|
|
16,580,624
|
|
|
|
13,597,272
|
|
Computers and software
|
|
|
19,410,740
|
|
|
|
12,648,125
|
|
Equipment and vehicles
|
|
|
279,330
|
|
|
|
243,404
|
|
Accumulated amortization
|
|
|
(26,709,587
|
)
|
|
|
(15,806,228
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
61,661,813
|
|
|
$
|
43,604,970
|
|
|
|
|
|
|
|
|
|
|
Included in the cost of property and equipment are costs of
$11,212,848 in fiscal 2008 and $6,052,786 in fiscal 2007
capitalized in connection with internally developed software as
part of the Companys ERP implementation.
Depreciation expense related to property and equipment was
$14,818,642 in fiscal 2008, $7,321,583 in fiscal 2007 and
$4,183,289 in fiscal 2006.
62
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company recorded a loss of $2,999,195 in fiscal 2008, nil in
fiscal 2007 and $229,950 in fiscal 2006 in property and
equipment for stores that were relocated or closed. These assets
were previously used in the corporate-owned stores segment.
|
|
5
|
GOODWILL
AND INTANGIBLE ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
February 1,
|
|
|
February 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
Goodwill
|
|
$
|
738,242
|
|
|
$
|
738,242
|
|
Changes in foreign currency exchange rates
|
|
|
35,886
|
|
|
|
224,376
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
774,128
|
|
|
$
|
962,618
|
|
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
|
|
|
|
|
|
Reacquired franchise rights
|
|
$
|
10,162,546
|
|
|
$
|
7,566,037
|
|
Non-competition agreements
|
|
|
694,177
|
|
|
|
694,177
|
|
Accumulated amortization
|
|
|
(3,162,154
|
)
|
|
|
(2,793,406
|
)
|
Changes in foreign currency exchange rates
|
|
|
(308,363
|
)
|
|
|
1,689,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,386,206
|
|
|
|
7,155,970
|
|
|
|
|
|
|
|
|
|
|
Total goodwill and intangibles
|
|
$
|
8,160,334
|
|
|
$
|
8,118,588
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets was
$1,004,308, $1,019,150 and $435,223 for the years ended
February 1, 2009, February 3, 2008 and
January 31, 2007, respectively. The estimated aggregate
amortization expense is as follows:
|
|
|
|
|
Fiscal Year Ending
|
|
|
|
|
2010
|
|
$
|
994,423
|
|
2011
|
|
|
994,423
|
|
2012
|
|
|
994,423
|
|
2013
|
|
|
994,423
|
|
2014
|
|
|
846,921
|
|
2015 and beyond
|
|
|
2,561,593
|
|
|
|
|
|
|
|
|
$
|
7,386,206
|
|
|
|
|
|
|
On September 15, 2008, the Company reacquired in an asset
purchase transaction two franchised stores in Victoria, British
Columbia for total cash consideration of $1,181,117 less working
capital adjustments of $3,851 from a related party. The fair
values of the net assets acquired were measured as if the
transaction occurred with a arms length party. Included in
the Companys consolidated statement of operations for the
year ended February 1, 2009, are the results of the two
reacquired Victoria franchised stores from the date of
acquisition through to February 1, 2009.
63
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the preliminary fair values of
the net assets acquired as of September 15, 2008:
|
|
|
|
|
Inventory
|
|
$
|
306,058
|
|
Prepaid and other current assets
|
|
|
2,370
|
|
Property and equipment
|
|
|
261,497
|
|
Reacquired franchise rights
|
|
|
779,625
|
|
|
|
|
|
|
Total assets acquired
|
|
|
1,349,550
|
|
Unredeemed gift card liability
|
|
|
172,284
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
172,284
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
1,177,266
|
|
|
|
|
|
|
On September 8, 2008, the Company reacquired in an asset
purchase transaction a franchised store in Bellevue, Washington
for total cash consideration of $2,067,604 plus working capital
adjustments of $156,762. Included in the Companys
consolidated statement of operations for the year ended
February 1, 2009, are the results of the reacquired
Bellevue franchised store from the date of acquisition through
to February 1, 2009.
The following table summarizes the preliminary fair values of
the net assets acquired as of September 8, 2008:
|
|
|
|
|
Inventory
|
|
$
|
234,488
|
|
Prepaid and other current assets
|
|
|
37,692
|
|
Property and equipment
|
|
|
249,233
|
|
Reacquired franchise rights
|
|
|
1,754,665
|
|
|
|
|
|
|
Total assets acquired
|
|
|
2,276,078
|
|
Unredeemed gift card liability
|
|
|
51,712
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
51,712
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
2,224,366
|
|
|
|
|
|
|
On April 1, 2007, the Company reacquired in an asset
purchase transaction three franchised stores in Calgary for
$5,562,821. Included in the Companys consolidated
statement of operations for the year ended February 3, 2008
are the results of the three reacquired Calgary franchise stores
from the date of acquisition through February 3, 2008.
The following table summarizes the fair values of the assets
acquired on April 1, 2007:
|
|
|
|
|
Inventory
|
|
$
|
407,355
|
|
Prepaid and other current assets
|
|
|
52,492
|
|
Property and equipment
|
|
|
500,274
|
|
Reacquired franchise rights
|
|
|
5,006,059
|
|
|
|
|
|
|
Total assets acquired
|
|
|
5,966,180
|
|
Unredeemed gift card liability
|
|
|
403,359
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
403,359
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
5,562,821
|
|
|
|
|
|
|
The acquisition of the franchised stores is part of
managements vertical retail growth strategy. The
reacquired franchise rights are amortized on a straight-line
basis over their estimated useful lives. The weighted-average
remaining useful lives of the reacquired franchise rights was
7.46 years as at February 1, 2009 and 9.33 at
February 3, 2008.
64
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6
|
OTHER
NON-CURRENT ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
February 1,
|
|
|
February 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
Prepaid rent and security deposits
|
|
$
|
871,643
|
|
|
$
|
893,756
|
|
Deferred lease cost
|
|
|
1,717,739
|
|
|
|
1,013,747
|
|
Advances to and investments in franchise
|
|
|
2,863,353
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,452,735
|
|
|
$
|
1,907,503
|
|
|
|
|
|
|
|
|
|
|
During fiscal 2008 the Company entered into a Credit Agreement
(the Agreement) with its Australian franchise
partner, under which advances were provided by the Company to
the franchisee. The Agreement provides for a secured
non-revolving credit facility of up to AUD$3.9 million and
funds are only advanced upon approval by the Company. As of
February 1, 2009 a total of AUD$2.8 million has been
drawn on the line of credit.
The loan is designated as held to maturity and bears interest at
8% per annum which will accrue and capitalize to the loan
principal.
At the Companys option, the loan is convertible into
equity of the franchise three years after the effective date of
the Agreement. If the Company does not elect to convert the loan
at that time, the outstanding balance and interest is due and
payable within six months.
|
|
|
|
|
|
|
|
|
|
|
February 1,
|
|
|
February 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
Inventory purchases
|
|
$
|
15,771,686
|
|
|
$
|
3,062,890
|
|
Sales tax collected
|
|
|
1,681,022
|
|
|
|
2,132,053
|
|
Accrued rent
|
|
|
1,147,393
|
|
|
|
1,388,295
|
|
Lease exit costs
|
|
|
1,189,432
|
|
|
|
|
|
Other
|
|
|
2,313,501
|
|
|
|
663,817
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,103,034
|
|
|
$
|
7,247,055
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
OTHER
NON-CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
February 1,
|
|
|
February 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred lease liability
|
|
$
|
7,325,432
|
|
|
$
|
3,585,695
|
|
Tenant Inducements
|
|
|
3,975,281
|
|
|
|
3,135,518
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,300,713
|
|
|
$
|
6,721,213
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
LONG-TERM
DEBT AND CREDIT FACILITIES
|
In April, 2007, the Company executed a new credit facility with
a lending institution that provided for a CDN$20,000,000
uncommitted demand revolving credit facilities to fund the
working capital requirements of the Company. This agreement
cancels the previous CDN$8,000,000 credit facility. Borrowings
under the uncommitted credit facilities are made on a
when-and-as-needed
basis at the discretion of the Company.
Borrowings under the credit facility can be made either as
i) Revolving Loans Revolving loan borrowings
will bear interest at a rate equal to the Banks CDN$ or
USD$ annual base rate (defined as zero% plus the lenders
annual prime rate) per annum, ii) Offshore
Loans Offshore rate loan borrowings will bear
interest at a rate equal to a base rate based upon LIBOR for the
applicable interest period, plus 1.125 percent per annum,
iii) Bankers Acceptances Bankers acceptance
borrowings will bear interest at the bankers acceptance rate
plus 1.125 percent
65
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
per annum and iv) Letters of Credit and Letters of
Guarantee Borrowings drawn down under letters of
credit or guarantee issued by the banks will bear a
1.125 percent per annum fee.
At February 1, 2009, there were no borrowings outstanding
under this credit facility. As well, at February 1, 2009,
letters of credit totaling USD$211,920 and guarantees totaling
USD$1,454,653 had been issued under the facility, which reduced
the amount available by a corresponding amount.
Reorganization
in connection with initial public offering
On July 26, 2007, the Company completed an initial public
offering (IPO). In connection with the IPO, the
Company entered into an Agreement and Plan of Reorganization
dated April 26, 2007 (Reorganization
Agreement), with all of its stockholders, lululemon usa
inc. (Lulu US), lululemon athletica canada inc.
(Lulu Canada), Lulu Canadian Holding, Inc.
(LCHI), LIPO Investments (Canada) Inc.
(LIPO), LIPO Investments (USA), Inc. (LIPO
USA) and Slinky Financial ULC, an entity owned by a
principal stockholder of the Company, pursuant to which the
parties executed a corporate reorganization of the Company on
July 26, 2007, immediately following the execution of the
underwriting agreement entered into in connection with the IPO.
Prior to the reorganization, the interests in the Canadian,
U.S., and Japanese operating companies were held by third party
investors (48% subsequent to December 5,
2005) and by LIPO and its affiliates (52% subsequent
to December 5, 2005 and 100% prior to December 5,
2005). In the reorganization, all outstanding shares of the
Company, which consisted of Series A preferred shares
(Series A shares) and Series TS preferred
shares (Series TS Shares), and all outstanding
shares of LIPO, which was combined with the Company prior to the
reorganization, were exchanged for common shares of the Company
or exchangeable shares issued by LCHI, a wholly-owned subsidiary
of the Company. Upon completion of the reorganization, Lulu USA
and LCHI became direct or indirect wholly-owned subsidiaries of
the Company. Refer to Pre reorganization share capital section
below for additional details.
On the reorganization the holders of 107,995 Series A
shares and 116,994 Series TS shares were exchanged for
common shares of the Company, and the holders of the 117,000,361
LIPO shares exchanged those for common shares of the Company and
exchangeable shares of LCHI plus special voting stock of the
Company, in exchange for their LIPO shares. The exchangeable
shares of LCHI and the special voting shares of the Company,
when taken together, are the economic equivalent of the
corresponding common shares of the Company and entitle the
holder to one vote on the same basis and in the same
circumstances as one corresponding share of the common shares of
the Company. The exchangeable shares are exchangeable at any
time, at the option of the holder, on a
one-for-one
basis with the corresponding common shares of the Company.
In connection with the reorganization, Lulu US, a wholly-owned
subsidiary of the Company, repurchased all outstanding shares of
its non-participating preferred stock for a purchase price of
$1.00 per share, resulting in an aggregate purchase price of
$10,000.
Prior to the reorganization, LIPO and LIPO USA had created
stock-based compensation plans (the predecessor plans) for
eligible employees of Lulu Canada and Lulu US. The eligible
employees were granted options to acquire shares of LIPO and
LIPO USA. The outstanding unvested stock options of LIPO were
exchanged for options of LIPO USA which allow the holders to
acquire shares of LIPO USA. Vested LIPO options are immediately
exercised for shares in LIPO and then exchanged for a fraction
of an exchangeable share or common share in the Company. The
exercise price and the number of common shares of the Company
subject to the new Company stock options were also modified.
Refer to note 11 for additional information regarding
stock-based compensation.
For accounting purposes, the corporate reorganization has been
reflected as if the companies had been combined for all periods.
Authorized
share capital
As part of the reorganization in connection with the IPO, the
Companys stockholders approved an amended and restated
certificate of incorporation that provides for the issuance of
up to 200,000,000 shares of common stock,
66
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
5,000,000 shares of undesignated preferred stock and
30,000,000 shares of special voting stock. Upon completion
of the reorganization there were 44,290,778 shares of
common stock, 20,935,041 shares of exchangeable stock and
20,935,041 shares of special voting stock outstanding.
Additionally, 10,000,000 shares of common stock are
reserved for issuance under the Companys 2007 Equity
Incentive Plan. The Companys stock options outstanding
after completion of the reorganization were 4,479,176. The
outstanding stock options issued to purchase shares of Lulu
Canada and Lulu US prior to the reorganization were exchanged
for options to acquire common shares of the Company at an
adjusted exercise price. The exchange did not result in an
incremental charge as the relevant terms and conditions were set
to preserve the original fair value of the awards. Refer to
note 11 for additional details on stock options.
As part of the reorganization in connection with the IPO, on
July 26, 2007, a 2.38267841 for one stock split was
effected for all authorized, issued, and outstanding shares of
common stock of the Company. The common stock presented in the
consolidated financial statements and the notes to the
consolidated financial statements have been restated to properly
reflect this stock split.
The holders of the special voting stock are entitled to one vote
for each share held. The special voting shares are not entitled
to receive dividends or distributions or receive any
consideration in the event of a liquidation, dissolution or
wind-up. To
the extent that exchangeable shares as described below are
exchanged for common stock, a corresponding number of special
voting shares will be cancelled without consideration.
The exchangeable shares have been issued by LCHI and included in
these consolidated financial statements as equity. The holders
of the exchangeable shares have dividend and liquidation rights
equivalent to those of holders of the common shares of the
Company. The exchangeable shares can be converted on a one for
one basis by the holder at any time into common shares of the
Company plus a cash payment for any accrued and unpaid
dividends. Holders of exchangeable shares are entitled to the
same or economically equivalent dividend as declared on the
common stock of the Company. The exchangeable shares are
non-voting. The Company has the right to convert the
exchangeable shares into common shares of the Company at any
time after the earlier of July 26, 2047, the date on which
less than 2,093,504 exchangeable shares are outstanding or in
the event of certain events such as a change in control.
Pre
reorganization share capital
The authorized capital as at January 31, 2007 and
January 31, 2006 of the two pre reorganization companies
combined was as follows:
LIPO
Unlimited number of common shares, voting, without par value.
Prior to December 5, 2005, the pre reorganization combined
financial statements represented the combination of Lulu Canada
and Lulu US. The authorized share capital of Lulu Canada and
Lulu US for the period from February 1, 2004 to
December 5, 2005 was as follows:
Lulu
Canada
Unlimited number of Class A voting shares, Class B
shares, Class D shares and preferred shares, each without
par value.
Lulu
US
10,000,000 common shares with a par value of $0.001 per
share and 232,296 preferred shares issuable in series with a par
value of $0.0001 per share.
LAI
35,000,000 common shares, voting, with a par value of $0.01
per share and 5,750,000 preferred shares issuable in series with
a par value of $0.01 per share.
67
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
LAI had designated three series of preferred shares as follows:
a) Series A preferred stock
250,000 shares with a par value of $0.01 per share and a
stated value of $859.11 per share;
b) Series B preferred stock (Series B
shares) 250,000 shares with a par value
of $0.01 per share and a stated value of $859.11 per share;
c) Series TS preferred tracking stock
250,000 shares with a par value of $0.01 per share and a
stated value of $10.28 per share.
Each Series A share, Series B share and Series TS
share was entitled to 100 votes on all matters to be voted on by
the LAI stockholders with the caveat that the Series TS
shares shall not be entitled to vote on any matter relating to
LCHI or its subsidiaries.
In the event of a liquidation, dissolution or winding up of the
business and prior to the payment of any amount in respect of
any other class of shares, the holders of each Series A
share, Series B share and Series TS share were
entitled to receive in respect of each share, the Series A
liquidation preference, the Series B liquidation preference
and the Series TS liquidation preference, respectively,
where the liquidation preference for each share is the
unreturned original cost of that share plus the accrued and
unpaid dividends outstanding at the date of the liquidation
event. If, upon a liquidation event, the net assets available
for distribution to the stockholders are insufficient to fully
pay the Series A liquidation preference, the Series B
liquidation preference and the Series TS liquidation
preference then the available assets shall be distributed,
first, in respect of each Series A share pro-rata up to the
amount of the unreturned original cost of each Series A
share; second, in respect of each Series B share pro-rata
up to the amount of the unreturned original cost of each
Series B share; third, in respect of each Series TS
share pro-rata up to the amount of the unreturned original cost
of each Series TS share; fourth, in respect of each
Series TS share any accrued and unpaid dividends pro-rata
up to the total accrued and unpaid dividends outstanding at the
liquidation date; and fifth in respect of each Series A and
Series B share any accrued and unpaid dividends pro-rata up
to the total accrued and unpaid dividends outstanding at the
liquidation date. In any event, distributions made on
liquidation in respect of the Series TS shares shall not
exceed the net assets of Lulu US and its subsidiaries
attributable to the Series TS shares.
Each Series A share, Series B share and Series TS
share shall accrue preferred cumulative dividends at the rate of
8% of the stated value of the underlying share per annum,
compounded quarterly, adjusted for any stock dividends, splits,
combinations or other similar changes. Accrued dividends are
payable at the discretion of the board of directors and any
dividends paid to the Series A shares, the Series B
shares or the Series TS shares must be paid
contemporaneously to the other two classes of shares. Any
accrued and unpaid dividends owing to holders of Series A,
Series B or Series TS shares must be paid out prior to
any dividends being paid on the common shares. In addition, each
Series A, Series B and Series TS share is
entitled to receive dividends equal to 100 times the amount of
any dividend paid in respect of each common share. At
February 1, 2009, February 3, 2008, and
January 31, 2007 the amount of cumulative dividends was
nil, nil, and $9,907,054 respectively. On July 26, 2007, in
connection with the reorganization of the Company, the
cumulative dividends of $26,957,834 were settled for newly
created shares of LAI which resulted in 1,471,180 shares of
the Company being issued. The statement of stockholders
equity and earnings per share was retroactively adjusted to
reflect this stock dividend.
LAIs certificate of incorporation provided that in the
event of an IPO of LAI in which the gross cash proceeds to LAI
in the offering is at least $75 million, each then
outstanding Series A share, Series B share and
Series TS share shall be converted into 100 common shares
of LAI plus the number of then outstanding shares determined by
dividing the unreturned original cost and the accrued and unpaid
dividends attributable to each share by the public offering
price. Since the IPO of LAI did not result in LAI receiving at
least $75 million in gross proceeds, the foregoing
conversion provision in LAIs certificate of incorporation
did not apply to the IPO of LAI.
In connection with the IPO of LAI, the stockholders of LAI
agreed to exchange their Series A shares and Series TS
shares for common shares of LAI. These shares were effectively
cancelled upon completion of the IPO.
68
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
LIPO
Investments (Canada), Inc.
LIPO had designated one class of common share without par value.
Under corporate charters and agreements as in effect on
December 5, 2005, upon an IPO of LAI in which the gross
proceeds to LAI in the offering is at least $75 million,
all of the outstanding shares of LIPO would be exchanged for
Series B shares of LAI, followed by the conversion of each
Series B share into 100 common shares of LAI plus the
number of common shares of LAI resulting from dividing the
liquidation value of Lulu Canada Class B Shares held by
LIPO calculated as the stated value $859.11 and accrued dividend
thereon at 8%, by the initial public offering price. Since the
IPO of LAI did not result in LAI receiving at least
$75 million in gross proceeds, the foregoing exchange and
conversion provisions did not apply to the IPO of LAI.
In connection with the IPO of LAI, the stockholders of LIPO
agreed to exchange their shares for common shares of LAI.
lululemon
athletica canada inc.
Prior to December 5, 2005, Lulu Canada had 100 Class A
voting common shares outstanding and issued. These shares were
effectively cancelled on December 5, 2005 upon completion
of the transactions described under Summary of Share
Capital Transactions December 2005 below.
lululemon
usa inc.
Prior to December 5, 2005, Lulu US had 100 common shares
outstanding and issued. These shares were effectively cancelled
on December 5, 2005 upon completion of the transactions
described under Summary of Pre reorganization of Share
Capital Transactions December 2005 below.
Summary
of Pre reorganization Share Capital Transactions
December
2005
On December 5, 2005, the principal stockholder of the
company directly or indirectly held all of the issued and
outstanding interests in Lulu Canada and Lulu US. On
December 5, 2005, the principal stockholder agreed to sell
a 48% interest in these operating companies to third party
investors. In conjunction with this sale, three holding
companies (LIPO, LAI and LCHI) were created to hold the
interests in the operating companies (Lulu Canada and Lulu US).
On December 5, 2005, through a series of transactions, Lulu
Canada became a subsidiary of LIPO, and LCHI, which is wholly
owned by LAI, acquired a 48% interest in Lulu Canada; Lulu US
became a subsidiary of LAI; and Lulu FC became a subsidiary of
Lulu US. The foregoing transactions resulted in the issuance by
Lulu Canada of 106,702 Class A shares to LCHI and 115,594
Class B shares to LIPO. The Lulu Canada Class A and B
shares have no par value. Each Class A and Class B
share has a stated value of $859.11 per share or an aggregate
stated value of $190,976,717. The third party investors acquired
75% of their interests from the principal stockholder for cash
consideration. The remaining 25% of their interests was acquired
through an issuance of preferred shares in LAI for cash
consideration of $23 million.
As a result of this series of transactions, the principal
stockholder effectively retained a 52% interest in the Company
and the third party investors acquired a 48% interest in the
Company. The principal stockholders interest is
subordinate to the stock issued to the third party investors.
This series of transactions resulting in the operating companies
becoming subsidiaries of the respective holding companies have
been accounted for as transactions between entities under common
control with of the interests reflected at the carrying amounts
as held by the principal stockholder. The acquisition of the 36%
interest from the principal stockholder has been accounted for
as an acquisition of shares by the Company with proceeds in
excess of the carrying value of $69,005,127 being reflected as a
distribution to the principal stockholder. The acquisition of
the remaining 12% interest acquired by the third party investors
has been accounted for as a purchase of shares from treasury of
LAI.
69
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On December 5, 2005 Lulu US authorized and issued 10,000
non-participating preferred shares with a par value of $0.001
per share to LIPO USA and third party investors and 222,296
participating preferred shares with a par value per share of
$0.001 to the Company. The non-participating preferred shares
have an aggregate stated value of $10,000 and the participating
preferred shares have an aggregate stated value of $2,312,990.
As part of the reorganization in connection with the IPO, Lulu
US repurchased all outstanding shares of its non-participating
preferred stock for a purchase price of $1.00 per share.
December
2006
During 2006, LAI issued 500 Series A preferred shares to
two directors for cash consideration of $446,419. As these
shares were issued at a price below market value, a charge of
$188,008 was recorded as non-cash compensation expense in the
combined consolidated statement of operations. These shares were
unrestricted at the date of issuance and the fair value was
determined by the Company based on an analysis of EBITDA and
revenue multiples.
|
|
11
|
STOCK-BASED
COMPENSATION
|
Share
option plans
The Companys employees participate in various stock-based
compensation plans which are either provided by a principal
stockholder of the Company or the Company.
During the year ended January 31, 2006, LIPO and LIPO USA,
entities controlled by a principal stockholder of the Company,
created a stockholder sponsored stock-based compensation plans
(LIPO Plans) for certain eligible employees of the
Company in order to provide incentive to increase stockholder
value. Under the provisions of the LIPO plans, the eligible
employees were granted options to acquire shares of LIPO and
LIPO USA, respectively. LIPO and LIPO USA held shares in LACI
and the Company, respectively. These plans provide that the
board of directors of LIPO and LIPO USA were able to exchange
the LIPO and LIPO USA shares held in trust for an equivalent
number of shares of the Company to be held by LIPO and LIPO USA,
respectively, on the exchange date. If an employee ceases
employment, the LIPO Plans provided that LIPO and LIPO USA would
repurchase the shares issued pursuant to the Series A
options at the fair market value of the shares. Shares issued
pursuant to the Series B options would be repurchased at
the exercise price paid. Subsequent to the reorganization
described in note 10, LIPO options and shares were
exchanged for options and common share equivalents of the
Company. Shares of the Company that are or will be issued to
holders of the options or restricted shares under the LIPO Plans
are currently held by LIPO USA, an affiliate of a principal
stockholder. The exercise, vesting or forfeiture of any of these
awards will not have any impact on the outstanding common shares
of the Company.
On July 3, 2006, the board of directors approved the
Lululemon Athletica Inc. Equity Incentive Compensation Plan and
the Lululemon Athletica USA Inc. 2005 Equity Incentive
Compensation Plan (Plans), which provide for the
grant of stock awards to employees, directors, consultants and
other individuals providing services to the Company. Lulu Canada
and Lulu US have each reserved 2,500,000 shares of common
stock for issuance under the Plans. The exercise price and
vesting conditions are determined by the board of directors for
each grant. The contractual life of the options is 10 years.
In July 2007, the Companys Board of Directors adopted, and
the Companys stockholders approved, in conjunction with
the reorganization of the Company, the 2007 Equity Incentive
Plan (note 10). Upon completion of the reorganization of
the Company, outstanding awards under the Companys
predecessor plan were exchanged for awards under the 2007 Plan
in such a way that no incremental stock-based compensation
expense resulted from the exchange. The 2007 Plan provides for
the grants of stock options, stock appreciation rights,
restricted stock or restricted stock units to employees
(including officers and directors who are also employees) of the
Company. Stock options granted to date have a four-year vesting
period and vest at a rate of 25% per each year on the
anniversary
70
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
date of the grant. Restricted stock issued under the 2007 Plan
vest one year from the grant date. To date, 19,779 shares
of restricted stock have been issued under the 2007 Plan to
certain directors of the Company.
The Companys policy is to issue shares upon the exercise
of Company options from treasury. Any shares issued to employees
related to stockholder sponsored plans are provided by the
principal stockholder and are not issued from treasury or
repurchased by the Company.
As described in note 10, a reorganization and stock split
resulted in changes to the capital structure of the Company.
Information in this note has been presented to reflect the
combination of the principal stockholder sponsored plans. The
number of options and exercise prices for options issued under
the predecessor plans prior to the corporate reorganization have
been presented to reflect the replacement options of the Company
that have been issued as if the replacement options had always
been issued.
Stock-based compensation expense charged to income for the plans
was $6,532,308, $5,947,097 and $2,829,572 for the years ended
February 1, 2009, February 3, 2008 and
January 31, 2007, respectively.
Total unrecognized compensation cost for all stock option plans
was $11.9 million as at February 1, 2009, which is
expected to be recognized over a weighted-average period of
2.7 years and $18.4 million as at February 3,
2008.
Employee
stock purchase plan
The Companys Board of Directors and stockholders approved
the Companys Employee Stock Purchase Plan
(ESPP) in September 2007. The ESPP allows for the
purchase of common stock of the Company by all eligible
employees at a 25% discount from fair market value subject to
certain limits as defined in the ESPP. The maximum number of
shares available under the ESPP is 3,000,000 shares. During
the year ended February 1, 2009, 57,333 shares were
purchased under the ESPP, which were funded by the Company
through open market purchases.
Stockholder
sponsored stock options
On December 1, 2005, LIPO and LIPO USA each granted
5,295,952 Class A options with an exercise price of
CDN$0.00001 and an expiry date of December 31, 2009 and
11,062,179 Class B options with an expiry date of
December 31, 2010, respectively, prior to the
reorganization (note 10). The LIPO and LIPO USA
Class B options originally had exercise prices of CDN$0.99
and $0.01, respectively. Each Class A option and each
Class B option entitled the holder to acquire one share of
common stock of LIPO and LIPO USA respectively.
While all of the Class A options of both companies vested
on December 5, 2005 and were immediately exercised,
3,549,444 of the common shares of LIPO and LIPO USA issued were
designated as forfeitable. These forfeitable shares were
considered to be non-vested for accounting purposes and were
considered not to be earned as of December 5, 2005. These
non-vested shares become non-forfeitable over a four-year
requisite service period to December 5, 2009. In addition,
on December 5, 2005, 2,239,395 of the Series B options
vested, with the remaining options vesting over a five-year
period ending December 5, 2010.
In connection with the reorganization of the Company
(note 10) modifications were made to the LIPO and LIPO
USA plans. The 5,285,154 LIPO Class A awards and the
4,110,511 vested LIPO Class B awards were exchanged for a
total of 1,959,819 exchangeable shares of the Company through a
series of transactions. At the time of the reorganization,
1,418,426 of the new awards were considered to be vested and the
remaining 541,393 new awards were considered to be unvested. The
unvested exchangeable shares are held in trust by the principal
stockholder and are subject to the same vesting schedule as the
original LIPO award.
71
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes the exchangeable shares granted
under the stockholder sponsored plan. Amounts are presented on a
post reorganization basis.
|
|
|
|
|
|
|
Number of
|
|
|
|
Exchangeable
|
|
|
|
Shares
|
|
|
Non-forfeitable balance at January 31, 2006
|
|
|
1,171,827
|
|
Granted
|
|
|
|
|
Vested
|
|
|
630,434
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
Non-forfeitable balance at January 31, 2007
|
|
|
541,393
|
|
Granted
|
|
|
|
|
Vested
|
|
|
276,091
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
Non-forfeitable balance at February 3, 2008
|
|
|
265,302
|
|
Granted
|
|
|
|
|
Vested
|
|
|
169,847
|
|
Cancelled
|
|
|
57,629
|
|
|
|
|
|
|
Non-forfeitable balance at February 1, 2009
|
|
|
37,826
|
|
|
|
|
|
|
The total unrecognized compensation cost related to exchangeable
shares was $121,674 at February 1, 2009.
In connection with the reorganization of the Company
(note 10), the 5,285,154 LIPO USA Class A awards were
exchanged for LIPO USA shares through a series of transactions,
resulting in 264,439 awards outstanding in lululemon share
equivalents. At the time of the reorganization, 146,342 of the
new awards were considered to be vested and the remaining
118,097 awards were considered to be unvested and are subject to
the same vesting schedule as the original LIPO awards.
The following table summarizes the LIPO USA shares granted under
the stockholder sponsored plan. Amounts are presented on a post
reorganization basis and are shown in lululemon share
equivalents.
|
|
|
|
|
|
|
Number of
|
|
|
|
LIPO USA
|
|
|
|
Shares
|
|
|
Unvested balance at January 31, 2006
|
|
|
177,616
|
|
Granted
|
|
|
|
|
Vested
|
|
|
59,519
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
Unvested balance at January 31, 2007
|
|
|
118,097
|
|
Granted
|
|
|
|
|
Vested
|
|
|
60,229
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
Unvested balance at February 3, 2008
|
|
|
57,868
|
|
Granted
|
|
|
|
|
Vested
|
|
|
37,046
|
|
Cancelled
|
|
|
12,569
|
|
|
|
|
|
|
Non-forfeitable balance at February 1, 2009
|
|
|
8,253
|
|
|
|
|
|
|
The total unrecognized compensation cost related to LIPO USA
shares was $1,557 as at February 1, 2009.
72
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In connection with the reorganization of the Company
(note 10), the 16,841,989 LIPO Class B unvested awards
and LIPO USA Class B awards were exchanged for LIPO USA
options using a conversion factor set out in the reorganization
agreement and resulting in the issuance of new awards which were
equivalent to 1,474,821 lululemon shares. At the time of the
reorganization, 200,879 of the awards were considered to be
vested and the remaining 1,273,942 awards were considered to be
unvested. The vesting terms of these LIPO USA options were not
changed.
The cancellation of the LIPO Class B unvested options and
the issuance of the new LIPO USA options occurred with the
relative fair value and other terms and conditions being
preserved through the number and terms of new options being
granted resulting in no incremental compensation cost to the
Company.
The following table summarizes the LIPO USA options granted
under the stockholder sponsored plan. Amounts are presented on a
post reorganization basis and are shown in lululemon share
equivalents.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Average
|
|
|
|
LIPO USA
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Unvested balance at January 31, 2006
|
|
|
1,370,186
|
|
|
$
|
0.01
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
96,244
|
|
|
$
|
0.01
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested balance at January 31, 2007
|
|
|
1,273,942
|
|
|
$
|
0.01
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
393,095
|
|
|
$
|
0.01
|
|
Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested balance at February 3, 2008
|
|
|
880,847
|
|
|
$
|
0.01
|
|
Granted
|
|
|
|
|
|
|
|
|
Vested
|
|
|
336,444
|
|
|
$
|
0.01
|
|
Cancelled
|
|
|
253,419
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Unvested balance at February 1, 2009
|
|
|
290,984
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
The total unrecognized compensation cost related to LIPO USA
options was $448,371 at February 1, 2009.
The Company records compensation expense for shares issued under
the stockholder sponsored awards, over the requisite service
periods.
The vesting schedule of the stockholder sponsored awards in
lululemon share equivalents is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchangeable
|
|
|
LIPO USA
|
|
|
LIPO USA
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Options
|
|
|
December 5, 2005
|
|
|
787,992
|
|
|
|
86,823
|
|
|
|
104,635
|
|
December 5, 2006
|
|
|
630,434
|
|
|
|
59,519
|
|
|
|
96,244
|
|
December 5, 2007
|
|
|
276,091
|
|
|
|
60,229
|
|
|
|
393,095
|
|
December 5, 2008
|
|
|
198,877
|
|
|
|
43,384
|
|
|
|
383,922
|
|
December 5, 2009
|
|
|
66,425
|
|
|
|
14,490
|
|
|
|
315,055
|
|
December 5, 2010
|
|
|
|
|
|
|
|
|
|
|
181,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,959,819
|
|
|
|
264,445
|
|
|
|
1,474,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The weighted-average remaining contractual term for the options
outstanding and exercisable at February 1, 2009 is
1.2 years.
The fair value of the non-forfeitable and forfeitable shares
issued under LIPO Class A was measured at the fair value of
the underlying stock on the grant date. The fair value of the
LIPO Class B options was determined using the Black-Scholes
option pricing model with the following assumptions:
|
|
|
|
|
Dividend yield
|
|
|
0%
|
|
Expected volatility
|
|
|
45%
|
|
Risk-free interest rate
|
|
|
5%
|
|
Weighted-average expected life of option (years)
|
|
|
5.0 years
|
|
The expected volatility was based on available information on
volatility from a peer group of publicly traded U.S. and
Canadian retail apparel companies. The expected life of the
options was determined by reviewing data about exercise patterns
of employees in the retail industry as well as considering the
probability of a liquidity event such as the sale of the Company
or an IPO and the potential impact of such an event on the
exercise pattern. The risk-free interest rate approximates the
yield on benchmark Government of Canada bonds for terms similar
to the contract life of the options.
The weighted-average estimated fair value at the date of grant
for the non-forfeitable shares and options granted by LIPO and
LIPO US was CDN$0.67 and CDN$0.0067, respectively, for the year
ended January 31, 2006.
The total fair value of awards under the stockholder sponsored
plans that vested during the years ended February 1, 2009,
February 3, 2008 and January 31, 2007 was
$1.1 million, $1.3 million and $1.8 million,
respectively.
Company
stock options
Prior to the reorganization described in note 10, the
Company had an option plan and LACI had an option plan.
Employees received the same number of options in each company.
In conjunction with the reorganization, the Company modified the
previous companies sponsored stock options. On the date of the
reorganization 1,879,891 options of LACI with a weighted-average
exercise price of $1.38 were exchanged for 4,479,176 options of
the Company with a weighted-average exercise price of $0.58. The
vesting terms and the term of the options were not modified. On
the date of the reorganization, the Company compared the fair
value of the modified Company option to the fair value of the
Company and LACI options immediately before the modification and
determined there was no incremental compensation cost as a
result of this modification. The information presented below
reflects the impact of these modifications and the stock split
described in note 10 as if the reorganization had occurred
when the plans were introduced.
74
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the Companys stock options and restricted
shares activity as of February 1, 2009, February 3,
2008 and January 31, 2007 and changes during the years then
ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
Number of
|
|
|
Average
|
|
|
Number of
|
|
|
Average
|
|
|
|
Stock
|
|
|
Exercise
|
|
|
Restricted
|
|
|
Grant
|
|
|
|
Options
|
|
|
Price
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Granted
|
|
|
4,569,477
|
|
|
$
|
0.58
|
|
|
|
|
|
|
$
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
47,644
|
|
|
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 31, 2007
|
|
|
4,521,833
|
|
|
$
|
0.58
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
416,219
|
|
|
|
25.49
|
|
|
|
10,458
|
|
|
|
19.43
|
|
Exercised
|
|
|
92,555
|
|
|
|
0.58
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
47,163
|
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 3, 2008
|
|
|
4,798,334
|
|
|
$
|
2.74
|
|
|
|
10,458
|
|
|
$
|
19.43
|
|
Granted
|
|
|
544,927
|
|
|
|
21.66
|
|
|
|
9,321
|
|
|
|
24.04
|
|
Exercised
|
|
|
2,310,623
|
|
|
|
0.62
|
|
|
|
10,458
|
|
|
|
19.43
|
|
Forfeited
|
|
|
1,127,891
|
|
|
|
2.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at February 1, 2009
|
|
|
1,904,747
|
|
|
$
|
10.83
|
|
|
|
9,321
|
|
|
$
|
24.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options
outstanding and exercisable at February 1, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
Range of
|
|
Number of
|
|
|
Exercise
|
|
|
Remaining
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
Exercise Prices
|
|
Options
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Options
|
|
|
Price
|
|
|
(Years)
|
|
|
$0.49 - $0.60
|
|
|
1,034,601
|
|
|
$
|
0.58
|
|
|
|
7.8
|
|
|
|
518,255
|
|
|
$
|
0.58
|
|
|
|
7.7
|
|
$6.98 - 18.30
|
|
|
324,271
|
|
|
|
15.71
|
|
|
|
9.0
|
|
|
|
56,830
|
|
|
|
18.00
|
|
|
|
8.5
|
|
$19.37 - $29.20
|
|
|
396,482
|
|
|
|
24.33
|
|
|
|
9.5
|
|
|
|
|
|
|
|
|
|
|
|
0.0
|
|
$33.66 - $50.46
|
|
|
149,393
|
|
|
|
35.34
|
|
|
|
8.9
|
|
|
|
37,910
|
|
|
|
35,33
|
|
|
|
8.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,904,747
|
|
|
$
|
10.83
|
|
|
|
8.4
|
|
|
|
612,995
|
|
|
$
|
4.35
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intrinsic Value
|
|
$
|
6,434,269
|
|
|
|
|
|
|
|
|
|
|
$
|
3,222,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 1, 2009, the unrecognized compensation cost
related to these options was $11.9 million, which is
expected to be recognized over a weighted-average period of
2.7 years; and the total aggregate intrinsic value for
stock options outstanding and exercisable was $3.2 million.
The intrinsic value of stock options exercised during the years
ended February 1, 2009, February 3, 2008 and
January 31, 2007 was $50.1 million, $2.6 million
and nil. The weighted-average grant date fair value of options
granted during the years ended February 1, 2009,
February 3, 2008 and January 31, 2007 was $10.20,
$13.28 and $3.53, respectively.
The fair value of options with service conditions was determined
at the date of grant using the Black-Scholes model. Expected
volatilities are based on a review of a peer group of publicly
traded apparel retailers. The expected term of options with
service conditions is the simple average of the term and the
requisite service period as stated in the respective option
contracts. The risk-free interest rate for Lulu Canada is the
Bank of Canada bank rate and for Lulu US is the Federal Reserve
federal funds rate.
75
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
lululemon
|
|
|
|
athletica inc.
|
|
|
Dividend yield
|
|
|
0%
|
|
Expected volatility
|
|
|
45%
|
|
Risk-free interest rate
|
|
|
1.5%
|
|
Weighted-average life
|
|
|
5.96 years
|
|
Options
with performance and/or market conditions
Certain options under the Plans were granted with a potential to
vest based on the return multiple achieved in connection with
the sale by certain of the Companys stockholders of 80% of
their holding of the Companys capital stock through one or
a series of transactions. The percentage of options under grant
that vest increased in defined increments as the return multiple
increases. A minimum return multiple of two was required for any
of the options to vest and all options vest if a return multiple
of five is achieved. These options had a contractual life of
10 years. During the year ended January 31, 2007, the
Company granted 1,114,890 options with these terms with a
weighted-average exercise price of $0.58. Of these options, all
were vested and exercised as at February 1, 2009.
The fair value of these options was determined by first
considering a range of potential outcomes with regard to the
timing of the sale transaction. Probabilities were ascribed to
different terms based on knowledge of the investors
strategy for the fund, general market conditions at the time of
the grant, volatility assumptions and other relevant
information. The weighted-average of these probabilities was
used as the requisite service period.
The valuation also considered the probability of the
stockholders achieving the threshold multiples stipulated in the
option agreement was developed. Probabilities were assigned
based on the Companys growth plans, the option holders and
managements expectations at the time of the grant, the
anticipated time of the sale transaction as noted above and
other relevant information. The weighted-average of the assigned
probabilities was used as the most likely multiple to be
achieved.
The weighted-average probabilities developed above were used as
input for a valuation simulation to establish the option values.
Other terms used in the probabilities based valuation simulation
were consistent with those used for the time-vested options
noted above except for the term that was shortened to four years
consistent with the employment contract of the option holder.
In November 2007, in recognition of the fact that the original
option agreements were prepared at the time the Company was not
a publicly traded company and contained provisions more suitable
for a private company than a public company, the Company agreed
with an officer of the Company to modify the replacement
options. The options were amended to delete
drag-along provisions benefiting our institutional
investors, requiring the officer to participate in and otherwise
support change of control transactions favored by our
institutional investors. The options were amended to vest
pursuant to certain return multiples received in connection with
a sale of substantially all of our assets or the sale by certain
of our stockholders of at least 80% of their capital stock (or
realize a return equal to five times their original investment,
regardless of percentage of shares sold) in one transaction or a
series of transactions, including our initial public offering.
The remaining terms of those options are unchanged. The
incremental compensation cost resulting from the modification of
these awards will be amortized over the remaining expected term
consistent with the initial valuation amount.
76
lululemon
athletica inc. and Subsidiaries
NOTES TO
THE CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The modification analysis was performed using Monte Carlo
simulations and resulted in the following amendments:
|
|
|
|
|
|
|
|
|
|
|
Original Award
|
|
|
Modified Award
|
|
|
Options Outstanding
|
|
|
1,114,890
|
|
|
|
1,114,890
|
|
Intrinsic Value
|
|
$
|
39.92
|
|
|
$
|
39.92
|
|
Weighted-average expected options to vest
|
|
|
96.5%
|
|
|
|
98.4%
|
|
Weighted-average fair value of options
|
|
$
|
27.65
|
|
|
$
|
29.09
|
|
Weighted-average total value
|
|
$
|
30,823,763
|
|
|
$
|
32,305,411
|
|
Total fair value to the Company
|
|
$
|
983,664
|
|
|
$
|
1,883,664
|
|
The weighted-average valuation difference between the original
award and the modified award was approximately $900,000. This
incremental cost was amortized over the remaining originally
estimated service period and has been fully recognized as at
February 1, 2009. The weighted-average exercise price and
term of the options did not change as a result of the
modification and remain at $0.58 and 10 years, respectively.
In conjunction with the IPO, the Companys capital
structure was reorganized such that LIPO became an indirect,
wholly-owned subsidiary of the Company, and the holders of
preferred shares of the Company acquired common shares of the
Company in exchange for their preferred shares, while the
holders of LIPO shares acquired either common shares of the
Company or a combination of exchangeable shares of LCHI plus
shares of special votin